An arbitration agreement is an agreement between employers and their employees to resolve any differences in front of a private arbitrator rather than a lawsuit in a civil court. Arbitration agreements are typically found in an employee's paperwork when he or she first gets hired. In most cases, your employer never tells the employee he or she is bound to arbitration in the case of a dispute, and even fewer would explain what that means.
Arbitration is governed by both state and federal law. In fact, California law often runs into conflict with federal law, and changes to the laws are ongoing. Arbitration is considered more efficient, cheaper, and faster by employers, but often employee rights are left behind. Arbitrators often side with employees, and may not take your rights as seriously as would a California court.
Below, our California employment law attorneys address frequently asked questions about arbitration agreements and how it may affect your case:
- 1. What is an arbitration agreement?
- 2. Why do employers require employees to sign arbitration agreements?
- 3. What laws govern arbitration agreements?
- 4. What types of claims can be subject to arbitration?
- 5. When is an arbitration agreement enforceable?
- 5.1 What contract law requirements exist for arbitration agreements?
- 5.2 What case law requirements exist for an arbitration agreement to be enforceable?
- 6. How do arbitration agreements affect class action lawsuits in California?
- 7. What is AB 3080?
An arbitration agreement is a contract signed between an employer and employee where any dispute between the two is held in front of a private arbitrator and not a California court. These agreements are typically found inside of a larger agreement and are rarely their own document. Agreements to arbitration can be short, and hidden in a larger document.
Arbitration is a simpler, more streamlined process than civil court litigation. It is also usually less expensive, one of the reasons employers like it so much. Arbitration is similar to litigation in the following ways:
- The employer and employee may be represented by lawyers;
- Information is exchanged between the parties;
- Witnesses may be called and questioned; and
- A hearing is held before a decision-maker.
Differences between arbitration and the court setting include:
- Right to obtain documents is typically more limited;
- Hearings typically occur in a conference room rather than a courtroom; and
- The arbitrator might be a retired judge, a lawyer, or a person with particular experience who is a licensed arbitrator.
There are many reasons that employers prefer arbitration to civil litigation. First and foremost, arbitration is a cheaper process than civil litigation. They tend to proceed much more quickly and are therefore cheaper because they save a great deal on attorney's fees.
The discovery process, or the exchange of information between the parties, also occurs much more quickly. Document exchange is usually more limited and therefore can proceed more quickly with fewer documents to review and consider.
One of the key aspects of the flexibility of the arbitration process is picking the arbitrator. Unlike a civil court case, where the parties are stuck with the judge to which they are assigned, arbitration allows the parties to choose an arbitrator who is experienced in the area of dispute. A drawback to this, however, is that employers often try to pick arbitrators they feel are favorable to their case.
One positive aspect of arbitration for employees is that California law requires employers to pay for the costs of arbitration. This is good because while arbitration is usually less expensive than civil litigation, it can still range in the tens of thousands of dollars in some cases.
There are two major laws that govern arbitration: one created by the California legislature and the other a product of the federal government:
- The California Arbitration Act (CAA), 1 and
- The Federal Arbitration Act (FAA). 2
The specific requirements of each law can differ, and conflicts between California and federal law often occur. Federal law trumps state law, and any inconsistencies will be struck in favor of federal law.
Nearly any legal claim can be subject to an arbitration agreement if it arises out of the employment relationship between employer and employee. Examples of claims that could be subject to arbitration include:
- Disputes over back pay;
- Harassment allegations;
- Retaliation claims;
- Discrimination claims;
- Wrongful termination claims;
- Failure to promote lawsuits; and
- Personal injury lawsuits arising from employment.
This is simply a small sample, and many other areas of dispute between an employee and employer may be subject to a valid arbitration agreement.
Arbitration agreements are subject to certain rules to be considered enforceable under California and federal law. If an arbitration agreement fails to meet these requirements, it can be held unenforceable. This means that an employee will not be allowed to file a claim in court, rather than be obligated under the contractual agreement to arbitrate.
In California, all contracts (including arbitration agreements), must be:
- supported by consideration, and
- drafted and signed without fraud, duress, mistake, or lack of capacity.
Conscionability has to do with fairness in the negotiation of the contract. Terms of an agreement are considered unconscionable if they unreasonably favor one side over the other, especially if the party favored is considered the more powerful party, such as an employer.
Consideration is an exchange of value for giving up the right to file a lawsuit in court. For most newly hired employees, the offer of a job is considered sufficient consideration for the contract. Other forms of consideration could be:
- Contract renewal;
- Additional vacation days; or
- Other forms of reasonable compensation.
Fraud and duress are illegal pressure to sign a contract. If found the contract will not be enforced. Mistake is an accidental signing or other error that could invalidate the contract. Lack of capacity refers to a person who is unable to sign a contract such as:
- A person who lacks the mental capacity to understand what he or she is signing; or
- A person under the age of 18 (minority).
The California Supreme Court ruled in Armendariz v. Foundation Health Psychare Services, Inc. that 5 factors must be present for arbitration agreements to be enforced, in addition to contract law requirements. 3 These requirements are:
- The agreement requires neutral arbitrators;
- It allows for more than minimal discovery;
- A written decision by the arbitrator is required;
- The agreement must allow all types of relief that would otherwise be available in court; and
- It may not require an employee to pay either unreasonable costs or any arbitrators' fees or expenses as any form of condition for access to the arbitration process.
While these conditions are in place, they are not always clear in how they are applied to each individual case. For example, what qualifies as "minimal discovery" is often open for interpretation, and sometimes results in a dispute over this issue.
Many employers require employees to sign waivers of a wage and hour class action as part of the arbitration agreement. This requires an employee to have his or her action heard on a singular basis, and the employee cannot participate in a group effort to file a lawsuit or arbitrate.
California has attempted to limit and sometimes ban class action waivers multiple times, and in nearly as many times the federal courts have held that federal law trumps California law, permitting class action waivers. 4 Whether a class action waiver is enforceable often depends on the type of claim at issue, and the facts and circumstances of the case.
With the help of an experienced employment attorney, you can know whether your waiver of a class action lawsuit is enforceable.
The California Legislature is currently working to pass a bill, AB 3080, which would make most types of arbitration agreements unlawful in the state. 5 The bill has now passed both the State Assembly and the State Senate and is headed to the Governor's desk for signature or veto.
The bill would change the Fair Employment and Housing Act and the Labor Code to forbid requiring an employee to agree to enter into or change an arbitration agreement on or after January 1, 2019.
If the bill is signed into law, an inevitable fight will begin. Employers want to continue to use arbitration agreements with their employees. Employers will bring federal lawsuits to argue that federal law trumps state law. Federal tends to favor the use of arbitration.
Call us for help...
For questions about California's arbitration agreement laws, or to confidentially discuss your case with one of our skilled California employment attorneys, do not hesitate to contact us at the Shouse Law Group.
We have local law offices in and around Los Angeles, San Diego, Orange County, Riverside, San Bernardino, Ventura, San Jose, Oakland, the San Francisco Bay area, and several nearby cities.
- Cal. Code of Civ. Procedure 1280 et seq.Cal. Code of Civ. Procedure 1280 et seq.
- Legal Information Institute. U.S. Code: Title 9 - ARBITRATION.
- Armendariz v. Foundation Health Psychare Services, Inc., 24 Cal.4th 83, 6 P.3d 669 (2000).
- See AT&T Mobility LLC v. Vincent Concepcion, 563 U.S. 333 (2011).
- California Legislative Information. AB-3080 Employment discrimination: enforcement.