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Arbitration Agreements in Employee Contracts - Potential Litigation

Arbitration Agreements in employee contracts are receiving close scrutiny by the California courts. While the state laws favor enforcement of valid arbitration agreements, the courts are reviewing the mandatory arbitration agreements in the employment arena to ensure the arbitration provisions are not unconscionable. The courts will not enforce an arbitration agreement that is unconscionable or contrary to public policy.

What constitutes an "unconscionable arbitration agreement"? For an arbitration agreement (whether as a separate agreement or included in a contract as a provision) to be deemed unconscionable, both procedural and substantive unconscionability must generally exist.

Procedural Unconscionability

Procedural unconscionability relates to the manner in which the arbitration agreement is presented to the employee. For example, courts will, at times, find unconscionabiilty if the employer misrepresented the terms of the arbitration agreement in order to obtain a signature. A recommendation to avoid this assertion of "he said/she said", a statement in the arbitration agreement or provision recommending that the employee seek independent legal advice regarding the provision and requiring a signature or initials to indicate acceptance of the arbitration agreement may be of assistance in a challenge of the arbitration agreement.

Substantive Unconscionability

Substantive unconscionability relates to provisions that may unduly favor the employer or create a disadvantage to the employee (e.g., limiting discovery, limiting the awards available to the parties, or requiring both parties to split the costs of arbitration). Note, courts have generally found that it is the employer's obligation to pay costs uniquely associated with arbitration. See, Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1072.

The courts have offered some good news to employers. Arbitration agreement or provisions contained in an employee handbook is enforceable, providing it is neither procedurally or substantively unconscionable. The courts have further recognized that in employment agreements and handbooks, there is some level of procedural unconscionability but without oppression or surprise and substantial unconscionability, the arbitration agreements will be upheld. See, Id. and Ajamian v. CantorCO2e (2012) 203 Cal.App.4th 771, 796.

Ariel Bedell is an experienced attorney at The Loftin Firm. For questions relating to any other California real estate, corporate governance, land use, or estate planning matter, contact Ms. Bedell at (760) 814-9649. 

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