Drafting an employment arbitration agreement that complies with California law has never been a simple task: Assembly Bill 51, which becomes effective on Jan. 1, 2020, adds another layer to the drafting elements that employers should consider in addition to three decades of court decisions on the subject.
AB 51 adds Section 432.6 to the Labor Code, and prohibits an employer, as a condition of employment, continued employment, or any employment-related benefit, from requiring an applicant or employee to waive any right to file a civil action or administrative complaint with the Department of Fair Housing, the state labor commissioner, or any other governmental agency. An employer may not threaten, retaliate or discriminate against or terminate any applicant or employee who refuses to consent to a waiver of any forum or procedure of any of these agencies or in a civil action.
Much has already been written about the likelihood that California courts will overturn AB 51, but predictions of its certain demise may be exaggerated. In the meantime, attorneys will need to go back to the drawing board to draft or revise arbitration agreements. In so doing, they must take account of the details of AB 51 as well as recent, key appellate court decisions affecting arbitration terms to help ensure that the agreements survive judicial scrutiny.
Limiting the Impact of AB 51
When presenting an agreement to an employee, a cover letter should clearly explain that entering into the arbitration agreement is completely voluntary, not signing it will not affect the opportunity to be employed, and signing it will not be a condition of continued employment. A recital should also appear in the agreement attesting to the fact that the employee has read and understood the agreement and is entering into it voluntarily.
The agreement must be supported by adequate consideration. The drafter cannot rely on the recent decision in Diaz v. Sohnen Enterprises, 34 Cal. App. 5th 126 (2019), holding that an agreement may be enforced if, after being told that continuing to work itself constitutes acceptance even if the employee refuses to sign. Accordingly, to support adequate consideration for agreeing, the cover letter could offer a small, but reasonable incentive, say $100 or $250, and state that the payment is unrelated to any benefit. If utilized, the agreement itself should integrate that the employee has accepted the amount, and state that the employee is receiving consideration unrelated to and independent of any employment benefit offered by the employer. Arguably, the waivers of rights would, in those circumstances, be voluntary and not a condition of employment.
To strengthen the defense of fairness and compliance with AB 51 if the agreement is later challenged, one provision should clearly carve out the right to file an administrative complaint or claim with any federal or state agency or governmental entity. However, it should provide that the parties will engage in individual arbitration rather than prosecute and defend a civil action if the Department of Fair Employment and Housing or Equal Employment Opportunity Commission issue a right-to-sue notice, and that the parties reserve the right to appeal an adverse ruling of a deputy labor commissioner in a wage claim. Failure to include carve outs that conform to AB 51 might be fatal to the ability to enforce the agreement.
The agreement should state that certain other claims are not subject to arbitration, for example, workers' compensation and unemployment insurance claims. The 9th U.S. Circuit Court of Appeals recently decided, however, that claims under the Employee Retirement Income Security Act can be subject to mandatory arbitration, overturning prior precedents. Dorman v. Charles Schwab & Co., 2019 DJDAR 7932 (9th Cir. 2019).
The Private Attorneys General Act gives an employee the right to seek civil penalties by acting as a representative of the state but, as the California Supreme Court recently ruled in ZB N.A., Zions Bankcorporation v. Superior Court, 8 Cal. 5th 175 (2019), back pay and other statutory damages are not available in a PAGA-only litigation. AB 51 incorporates case law holding an arbitration agreement unenforceable when it contains a waiver of the right to join or make claims for such civil penalties as a representative of co-workers as a private attorney general, at least where the waiver is a material term of the agreement. Montano v. Wet Seal Retail, Inc., 7 Cal. App. 5th 1248 (2015). Such a waiver in an existing agreement should be deleted.
Curiously, the Legislature added subparagraph (f) to the bill, which states that the bill is not intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act. The U.S. Supreme Court ruled in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018), that arbitration agreements that prohibit employees from initiating or participating in class actions are enforceable notwithstanding the right to engage in collective action under Section 8(a)(1) of the National Labor Relations Act. The decision is consistent with the California Supreme Court decision in Iskanian v. CLS Transportation L.A., L.L.C., 59 Cal. 4th 348 (2014), and several U.S. Supreme Court decisions cited in that ruling. These cases hold that the FAA preempts contrary state law denying enforcement of class action waivers.
Accordingly, the drafter should include language stating simply that the agreement is governed exclusively by the FAA which preempts any state laws. The agreement should state that the decision of the arbitrator is final and binding, and subject to appeal only as provided by the FAA.
Insofar as AB 51 would prohibit making a class action waiver a condition of employment, and given that it also is not intended to "invalidate" agreements that are enforceable under the FAA, nothing precludes the agreement from expressly stating that it is subject to and enforceable under the FAA. Thus, the drafter of the arbitration agreement should weigh the benefits of minimizing references to the California Arbitration Act, which could further strengthen the position that the agreement is enforceable under the federal statute. For example, while the drafter should consider broadly embracing the rights of the parties to pre-hearing discovery, no reference to the California Code of Civil Procedure need be made. Further, as to the hearing itself, no reference to the California Evidence Code would be necessary. Whether such references, if used, would preclude pre-emption of the FAA is uncertain.
While none of these considerations can guarantee enforceability, each adds weight in seeking to compel arbitration if the agreement is signed and on its face voluntarily.
Consider Recent Court Decisions
A spate of decisions, some very recent, also merit consideration. Every agreement to arbitrate is judged according to "whether the terms of the contract are sufficiently unfair, in view of all relevant circumstances, [such] that a court should withhold enforcement." Sanchez v. Valencia Holding Co., LLC, 61 Cal. 4th 899 (2015). The party resisting arbitration bears the burden of proving unconscionability. Procedural unconscionability and substantive unconscionability must be shown, but need not be present in the same degree and are evaluated on a sliding scale. The more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa. Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC, 55 Cal. 4th 223 (2012). "Where there is no other indication of oppression or surprise, the degree of procedural unconscionability of an adhesion agreement is low, and the agreement will be enforceable unless the degree of substantive unconscionability is high." Ajamian v. CantorCO2e, L.P., 203 Cal. App. 4th 771 (2012).
Other terms also add elements of fairness that might well carry weight in a motion to compel. Under the California Supreme Court standards in Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83 (2000), to be enforceable an arbitration agreement must provide for (1) a neutral arbitrator, (2) all forms of relief that would be available in court, (3) more than minimal discovery, (3) a written award, (4) and (5) no additional costs for the employee beyond those incurred in bringing the claim to court. Fitz v. NCR Corp., 118 Cal. App. 4th 702 (2004). The terms should specify that the neutral is selected by mutual agreement of the parties: an agreement that gives the employer the right to unilaterally select the arbitrator, requires the employee to pay a percentage of the arbitrator's costs, or places substantial limits on discovery will likely be unenforceable. Chavarria v. Ralphs Grocery Co., 733 F.3d 916 (9th Cir. 2013). The terms should state with precision the rights affected and the remedies waived, particularly that the employee is waiving the right to have any employment or post-employment dispute heard by a judge and jury. Prudential Ins. Co. of America v. Lai, 42 F.3d 1299 (9th Cir. 1994).
The agreement should be in written short sentences and plain English to the extent possible. If an arbitration agreement contains long paragraphs and excessive legalese, is printed in small font, or appears buried in a long document, then a court may refuse to enforce it. Cf. Nelsen v. Legacy Partners, 207 Cal. App. 4th 1115 (2012). Numerous courts have rejected arbitration provisions buried in handbooks and printed in small font size. The California Supreme Court disapproved an arbitration provision contained in a 51-line "dense paragraph" in 7- or 8.5-point font. OTO, L.L.C. v. Koh, 8 Cal. 5th 111 (2019). Use of a separate agreement in at least 12-point font is the better practice. Appellate court decisions have reached different results when considering whether the agreement should reference the rules of the organization of neutrals that will provide the lists of neutrals. One court found fatal, among other reasons for denying enforcement on appeal of trial court decision, that the agreement failed to specify which specific rules of the American Arbitration Association would apply. The better practice is to include the employment rules as an attachment or by highlighting the web address where the rules can be found. See Zullo v. Superior Court, 197 Cal. App. 4th 477 (2011). For example, jamsadr.com/rules-employment, adr.org/employment, or signatureresolution.com-rules. In either case, the agreement might state that a copy of the rules is available from Human Resources or at some other location.
If the agreement is provided to employees whose native languages are not English, best practices and case law suggest that the agreement be translated into those languages. Ramos v. Westlake Services, Inc., 242 Cal. App. 4th 674 (2015). In most cases, a signed translated agreement will preclude an employee from maintaining a disclaimer of having read and understood the agreement. Otherwise, the absence of mutual consent might render it unenforceable.
At least one California court found that requiring the dispute to be heard within 90 days from the date the arbitrator was selected unless extended by the arbitrator and limiting the hearing to a relatively brief number of days per side did not render the agreement unconscionable. Leos v. Darden Restaurants, Inc., 158 Cal. Rptr. 3d 384 (Cal. Ct. App. 2013), review granted Leos v. Darden Restaurants, 161 Cal. Rptr. 3d 699 (Cal. 2013). To better balance equities, any limits on the number of days for each side to present its case and the number of witnesses each may call should be subject to conferences with or formal requests to the arbitrator and left to her or his decision.
In the course of an employment dispute, either party may need access to a California superior court for injunctive relief. The employee, for example, may need an injunction to prevent alleged retaliation; the employer may need relief to prevent disclosure of proprietary or trade secret information. An agreement that carves out the right to seek preliminary injunctive relief in court does not render the agreement unconscionable. Baltazar v. Forever 21, Inc., 62 Cal. 4th 1237 (2016).
Choice of Law and Forum Selection
Employers who have headquarters outside of California but have employees in California are tempted in drafting arbitration agreements to require that employment disputes be adjudicated subject to the laws of the state of its principal office. Such agreements also require that the arbitration take place in that state. However, effective Jan. 1, 2017, Labor Code Section 925 provides that a contract entered into, modified or extended after that date may not require an employee who primarily resides and works in California to agree, as a condition of employment, to adjudicate outside of California a claim arising in California, nor may the agreement deprive the employee of substantive protections of California law with respect to a dispute arising in California. An agreement that violates these provisions is voidable. The Labor Code provision does not apply to a contract with an employee who is represented by legal counsel in negotiating an agreement containing these terms.
Who decides whether the agreement is enforceable, the arbitrator or a court? Previously, this was a gateway question for a court to decide when there was no contrary indication otherwise. Garden Fresh Restaurant Corporation v. Superior Court, 231 Cal. App. 4th 678 (2014). Under the FAA, when an agreement to arbitrate delegates to the arbitrator authority to decide whether a dispute is subject to arbitration under that agreement, a court has no power to decide that question. Even if the court believes that the claim is groundless, it must defer to the arbitrator the question of arbitrability. Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019).
The California Supreme Court likewise has determined that whether class-wide arbitration was available was a question for the arbitrator, and there is no presumption in California law or the FAA that such determinations are allocated to the court. Sandquist v. Lebo Automotive, Inc., 1 Cal. 5th 233 (2016). The court noted that parties who enter arbitration agreements expect that their disputes will be resolved without contact with the courts.
To remove all doubt, the drafter should include clear language that the arbitrator can decide threshold issues, such as whether an arbitration provision is valid, enforceable or applicable to the dispute. Ambiguity would force the parties initially to go to court over the validity, scope, and enforcement of the agreement an expensive option that would delay the whole process. Arbitrators have a natural inclination to hold onto cases before them, and when the parties have agreed to other terms, they should not hesitate to enforce this one.
The drafter may consider the wisdom of including pre-arbitration as a term of the agreement. To require such a proceeding and that the mediator's costs be divided between the parties (as is usual when mediation is voluntary) may be found to be unconscionable, but no significant decisions have addressed disputes over agreements containing these terms. Alternatively, making reference to an optional pre-arbitration effort, formal or informal, may invite negotiation on the prospect which, if agreed to, may reduce the cost, timing, and length of an arbitration to a single day. No significant decisions to date have discussed this issue.
What arbitration provisions do or do not survive in decisions after AB 51 remain unknown, and the drafter should proceed with caution.
Regardless, the Koh decision offers two final points to avoid the mistakes the defendant made in that case. When the agreement is final, the employer should present it to the employee in an appropriate setting (not at the employee's cubicle) and by an appropriate person (someone sufficiently senior, and not simply a lower-level messenger, capable of answering questions about the agreement). And the employee should be given time to review and consider whether to sign the document (not demanding that it be signed on the spot). These more respectful aspects in the employer-employee relationship will advance the fairness argument when the employer seeks to enforce the agreement.