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Arbitration Agreements: Overview and Recent Developments

by Jennifer Shaw and Julienne Correa | The Daily Recorder | October 4, 2023

Arbitration provides employers with an alternative venue to resolve disputes instead of litigation. Similar to litigation, a claimant files a claim and the parties resolve the dispute with a binding decision. However, claimants file claims with arbitration services, such as JAMS and the American Arbitration Association, which have their own set of rules and procedures. Additionally, although it is a binding decision, arbitration does not prevent employees from submitting claims to federal agencies, such as the Equal Employment Opportunity Commission. Arbitration also provides limited opportunities for appeal or challenging an award. Although it benefits the party that favors the decision, the losing party may not appreciate the limited opportunities for recourse.

Arbitration agreements must be carefully drafted to ensure the agreement’s validity and avoid unconscionability.  Courts will look to whether the agreement is procedurally and substantively unconscionable.  Procedural unconscionability looks at whether the formation of an agreement presents an “unequal bargaining power.” Substantive unconsionability looks at whether the substance of the agreement, such as the terms, is unfair to the employee.  Procedural and substantive unconsionability are evaluated on a sliding scale, such that the more substantive unconscionability, the less procedural unconscionability is required and vice versa.  To avoid the foregoing issues, (1) the agreement should broadly identify claims that are covered by the agreement, (2) the agreement should specify whether a court or an arbitrator determines if the agreement covers a particular dispute and which rules apply, and (3) the agreement should specify that the employer bears the cost of the arbitration proceeding.

The agreement should not limit a claimant’s time to bring a claim, statutorily imposed remedies, or a party’s ability to obtain “adequate discovery.” Other relevant considerations include: (1) the amount of time and pressure exerted on the party to sign the proposed agreement; (2) the length and complexity of the agreement; and (3) the employee’s education and  ability to review the agreement with an attorney.

Employers must also be careful as to when arbitration agreements are presented to employees. An arbitration agreement should be presented as a stand-alone document, and provide an appropriate proof of receipt if using electronic signature. Employers may include severability clauses to sever any illegal or unenforceable provisions and allow the remaining agreement to be enforceable.

In Chamber of Com.  v. Bonta, the federal appellate court held that California Assembly Bill 51, making it a criminal offense to require an existing employee or applicant to consent to arbitrate claims as a condition of employment, was preempted by the Federal Arbitration Act (“FAA”).  The FAA is national policy favoring arbitration and broad enforcement of arbitration agreements according to their terms. The FAA preempts state laws and court decisions that are incompatible with the FAA. Therefore, employers may mandate arbitration agreements as a condition of employment.

Arbitration agreements and be beneficial because arbitration is generally faster than litigation, and does not follow a court calendar. It allows for streamlined procedures, such as limiting the amount and type of discovery, and allowing informal exchanges of information. Arbitration also provides a more private procedure compared to ligation where court rulings tend to go public. Further, the fact-finder is an arbitrator rather than a jury. Arbitration especially benefits employers with 20 or more employees, because arbitration agreements can effectively limit potential liability. For instance, courts have held that class action waivers may be included in arbitration agreements to avoid class action litigation entirely.

Arbitration and PAGA Claims       

Employees may recover civil penalties for labor code violations on behalf of themselves or other aggrieved employees under the Private Attorneys General Act (“PAGA”). Individual PAGA claims refer to claims brought by the employee on behalf of themselves, while nonindividual PAGA claims refer to claims brought on behalf of other current or former employees. In Iskanian v. CLS Transp. L.A., LLC, the California Supreme Court held that employers cannot require employees to waive PAGA claims in arbitration agreements. However, in Viking River Cruises, Inc. v. Moriana, the United States Supreme Court held that individual PAGA claims may be compelled to arbitration because the FAA preempted that aspect of Iskanian’s rule.

In Adolph v. Uber Tech., Inc., the California Supreme Court considered whether a plaintiff-employee whose individual PAGA claims are submitted to arbitration maintains standing to pursue a nonindividual PAGA claim in litigation. The California Supreme Court held that  the plaintiff-employee does maintain standing to pursue nonindividual PAGA claims. Thus, if a plaintiff-employee has an individual and nonindividual claim, then employers may be faced with two actions. The individual claims are submitted to arbitration while the nonindividual claims continue in litigation. However, if the plaintiff-employee loses their individual PAGA claim in arbitration, the plaintiff-employee likely no longer has standing to maintain the nonindividual claims in litigation.

In sum, employers should review their arbitration agreements to ensure compliance with recent developments in the law.