California courts and the legislature generally disfavor arbitration agreements in the employment context. Employers with arbitration programs must be vigilant to ensure their agreements to arbitrate remain compliant with the law. Some recent developments in this area reveal a number of traps for unwary employers.

Drafting Valid Arbitration Agreements

Because employers draft arbitration agreements, any ambiguities will be resolved in favor of employees. For instance, in Rebodello v. Tilly’s Inc., a 2001 arbitration agreement excluded wage and hour claims and required three executives’ signatures to modify the agreement. The company then implemented a 2005 agreement that included wage and hour claims. The court held that the later agreement was unenforceable because it did not contain the executives’ signatures. Similarly, in Galen v. Redfin Corp., the court struck down an agreement that contained a general waiver of “all claims” without specifically referring to employment claims.

In another recent decision, the arbitration agreement contained conflicting severability clauses. The agreement included a standard severance clauseand a clause stating that the waiver of Private Attorney General Act (“PAGA”) claims could not be severed. The court ruled that the PAGA waiver was unlawful, and refused to sever the clause based on the plain language of the agreement. Accordingly, the entire agreement was determine to be invalid.

Securitas Security Services v. Superior Court.

In Cruise v. Kroger Co., the employer successfully enforced an unsigned arbitration agreement because the agreement was incorporated by reference into the employee’s job application. Employers should not rely too heavily on this decision, however; several courts have ruled that arbitration agreements must be stand-alone documents.

Agreements that reference the American Arbitration Association (“AAA”) rules automatically incorporate a provision that the arbitrator, not the court, will decide if the employee’s claims are arbitrable. See Universal Protection Service v. Superior Court. Courts have upheld the AAA employment rules as procedurally sufficient. However, employers should consult counsel about the potential ramifications, costs, and other consequences.

In Serafin v. Balco Properties Ltd., LLC, the employee signed an arbitration agreement that stated, “I have read and understood this policy.” The employee later challenged the agreement, arguing she had only indicated that she understood the arbitration agreement and not that she agreed to be bound by it. The Court upheld the arbitration agreement, which clearly stated that all claims “connected with your employment. . . must be submitted to binding arbitration.”

Waiver of Rights/Claims

In a mixed decision for employers, Iskanian v. CLS Transportation, the California Supreme Court held that class action waivers in arbitration agreements are enforceable. Employers vulnerable to class actions may desire arbitration agreements for this reason alone.

The Supreme Court treated “representative” cases under the Private Attorney General Act or PAGA differently, however. When a plaintiff brings a PAGA action, she essentially steps into the shoes of the government and sues on behalf of the state. The Court ruled this changed the claim from one that was between two private entities (the employee and employer) into a claim between the government and the employer. Accordingly, the PAGA waiver was against public policy. See also Montano v. Wet Seal Retail. As a result, if an employee asserts non-PAGA claims that are subject to the arbitration agreement, a court may stay the court proceedings and allow the parties arbitrate the non-PAGA claims before trying the PAGA claims in court. SeeFranco v. Arakelian Enterprises.

Employers should take care not to inadvertently waive the right to arbitrate. In Bower v. Inter-Con Security Systems, the employer answered a civil complaint and provided substantive responses to discovery requests. Over eight months later, the employer filed a petition to compel arbitration. The court ruled that the employer’s delay in seeking to enforce the arbitration agreement constituted a waiver and refused to enforce the agreement.

Reviewability of Arbitrator’s Decision

Once an arbitrator has ruled in a matter, courts generally will not review the merits of the case or the validity of the arbitrator’s reasoning. However, the California Supreme Court ruled in a 2010 decision, Pearson Dental Supplies, Inc. v. Superior Court, that there is an exception for statutory claims based on “unwaivable” rights. The Court reversed an arbitrator’s award because the arbitrator had erroneously ruled that the statute of limitations barred the employee’s claim. This denied the employee the right to a hearing on the merits, which the Court held was an unwaivable right under the Fair Employment and Housing Act.

In Richey v. Autonation, the arbitrator applied the wrong legal standard to the employee’s claim under the California Family Rights Act. The court upheld the arbitrator’s ruling anyway. In the Court’s view, the employee had received a hearing on the merits, even if the arbitrator applied the wrong law.

Erosion of Confidentiality

Employers have been attracted to arbitration partially because of the confidential nature of the process. Assembly Bill 802, which became effective on January 1, 2015, limits or eliminates this benefit. Under the new law, the major arbitration services (JAMS, AAA, etc.) must publish an online report disclosing information such as the employer’s name, the name of the employee’s counsel, the number of times the employer has been a party to arbitration, the type of claim, the amount of the award, if any and more. AB 802 may discourage employers from requiring employees to arbitrate their employment claims.

Tips for Employers

Employers must consider the benefits and burdens of mandatory arbitration agreements. These days, arbitration can be as costly and drawn out as defending a case in court. Also, employers are unlikely to convince arbitrators to dismiss a case prior to hearing, such as via motion for summary judgment. And, an arbitrator’s decision is generally final, even if wrongly decided.

On the other side of the equation, employers that include class action waivers in their arbitration agreements can potentially avoid multi-million dollar settlements. Another plus? Employers with arbitration programs need not worry about a jury taking a wrong turn. Arbitrators tend to have subject matter experience and are less likely to be swayed by charismatic plaintiff’s attorneys playing to jurors’ sympathies with irrelevant matters.

Employers that ultimately decide to proceed with arbitration should regularly review their arbitration agreements with experienced counsel to ensure the provisions in the agreements comply with the latest court decisions. Otherwise, the employer could spend money and time seeking arbitration, only to have a court rule that its agreement is unenforceable.

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