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Why Employment Arbitration Clauses May Not Be Enforceable

Martinez Law Office, Inc Sept. 5, 2023

In the past decade or so, an ever-increasing number of businesses have implemented alternative dispute resolution (ADR) procedures into employment agreements in an attempt to avoid the costly and disruptive litigation process when disputes arise. One of the most common ADR procedures is arbitration.  

When the employer and employee sign an arbitration clause, the parties agree to resolve any disputes through arbitration as opposed to court litigation. The problem with employment arbitration clauses is that they may not be enforceable unless they comply with the applicable requirements.  

If you are an employer who has questions about the enforceability of employment arbitration clauses, I can help. As a business law attorney at Martinez Law Office, Inc., I assist employers in California in drafting and reviewing employment and arbitration agreements. I represent businesses throughout Southern California, including Santa Ana, San Diego County, Orange County, and Los Angeles County.  

Arbitration Clauses & How They Are Used

Businesses often opt for arbitration clauses in employment agreements because resolving disputes through arbitration is usually less expensive, less disruptive, and more confidential compared to litigation. Employers may either include an arbitration clause in the employment agreement or create a separate arbitration agreement.  

According to the official website of the Superior Court of California in San Diego County, arbitration can be binding or non-binding: 

  • Binding arbitration means that the parties (employer and employee) waive their right to bring a dispute and court and agree to resolve any disputes through arbitration.  

  • Non-binding arbitration means that the parties can choose between litigation and arbitration.   

If your goal, as an employer, is to use an arbitration clause to protect your company from costly lawsuits that have the potential to disrupt your business operations, you may need to opt for binding arbitration. However, even with binding arbitration, it may not protect your business from all lawsuits as a suit may still be filed by a third party on behalf of an employee who signed an arbitration clause.  

Laws Addressing Arbitration Agreements

The laws that address arbitration agreements can be broken down into federal and state laws: 

  • Federal. The Federal Arbitration Act (FAA) governs arbitration agreements in business and employment contracts involving interstate commerce. The FAA preempts any state laws invalidating an arbitration agreement. The law does not apply to contracts of railroad employees, seamen, and other workers involved in interstate or foreign commerce.  

  • State. The California Arbitration Act mirrors many of the provisions of the FAA and protects the employer’s right to use mandatory arbitration clauses as a condition of employment. However, over the past few decades, the state’s Supreme Court rejected the treatment of arbitration under California law.  

A lack of understanding of the laws and rules that address arbitration can put the enforceability of your arbitration agreement or clause into question. For this reason, you will need to contact a business attorney to get knowledgeable assistance in drafting an arbitration clause or agreement.  

California Updated Rules Regarding Mandatory Arbitration (AB 51)

In 2000, the California Supreme Court ruled that an arbitration clause cannot be enforceable if it is both substantively and procedurally unconscionable:  

  1. Procedural unconscionability deals with the circumstances surrounding the formation and execution of the agreement; and 

  1. Substantive unconscionability refers to extreme unfairness in the agreement’s terms.  

The California Supreme Court ruled that an arbitration clause must provide the following rights and protections for employees for it to be considered substantively conscionable:  

  • The employee would not incur costs higher than if they had gone to court;  

  • The employee would be allowed broad arbitration discovery; 

  • The employee would be entitled to the same type of relief as if they went to court;   

  • The employee would get an adequate judicial review by receiving a written arbitration award notification; and 

  • The employee would have a guarantee that the arbitrator is neutral and unbiased.  

In addition to the requirements for procedural and substantive conscionability, employers in California should also consider the provisions of Assembly Bill 51 (AB 51), enacted on Jan. 1, 2020.  

The main purpose of AB 51 was to protect employees from forced arbitration and make it illegal for employers to require job applicants or existing employees to sign arbitration as a condition of employment. However, in February 2023, the federal Ninth Circuit Court of Appeals ruled that the federal law – the FAA – preempts California’s AB 51.  

California’s employment litigation landscape has changed significantly over the past few years, leaving hundreds of thousands of employers in the state wondering whether or not arbitration clauses are still enforceable. As a result, working with an attorney is extremely beneficial to understand your rights.  

Get the Help You Need Today

If you – as an employer in California – are thinking about drafting an arbitration agreement or including an arbitration clause into your employment agreements, contact an attorney first. At Martinez Law Office, Inc., I can help you navigate the ever-changing employment laws and explain what’s legal and what’s not when trying to implement a mandatory arbitration policy. Reach out to my office to learn everything you need to know about the enforceability of arbitration clauses.