Why Employment Arbitration Clauses May Not Be Enforceable

Arbitration clauses are often slipped into employment agreements to provide employers with a means to avoid costly lawsuits filed by employees. The agreements force employees into mandatory arbitration when they have grievances at work.

In 2019, California passed Assembly Bill (AB) 51, banning such agreements, but a federal judge placed a hold on the legislation because it conflicted with federal arbitration law. As of this writing, the ban is still being legally contested.

Even with the confusion over whether or when AB 51 will take effect — the original implementation date was January 2020 — employers may want to review their use of arbitration clauses, which are facing an increasingly hostile legal landscape in the Golden State.

If you’re an employer with questions about the use of arbitration clauses, or an employee who feels that your rights are being denied because of such clauses, contact the Law Offices of David H. Schwartz, INC. Attorney David Schwartz has been serving clients in the greater San Francisco area, including San Jose, Santa Clara, San Mateo, Oakland, and Alameda County, for 45 years.  

Arbitration Clauses and How They Are Used

Arbitration clauses in employment agreements give employers relief from costly lawsuits and also place restrictions on the discovery process leading up to the arbitration hearing. Employees have often complained that, when going into an arbitration hearing, they feel like the deck is stacked against them, though the hearing itself is held much like a court proceeding.

A study by the Economic Policy Institute concluded that the process tends to favor the employer: “Employers tend to win cases more often when they appear before the same arbitrator in multiple cases, indicating that they have a repeat-player advantage over employees from regular involvement in arbitration.”

Mandatory arbitration clauses often also include prohibitions against class action lawsuits, in addition to individual legal actions.

Laws Affecting Arbitration

Both the federal government and the state of California have laws addressing arbitration.

The Federal Arbitration Act is extremely employer-friendly and preempts any state statutes that go against its stipulations. In order for the FAA to apply, however, the business must be engaged in interstate commerce, which in this day and age includes the majority of businesses, since even an online presence can qualify as interstate commerce.

The California Arbitration Act — which predates AB 51 — basically mirrors the FAA, allowing employers to use mandatory arbitration agreements as a condition of employment, and businesses to do the same for products and services they market to consumers. The CAA, however, came under review and reinterpretation in 2000 by the California Supreme Court (read more about that below).

AB 51 and the Rights of Employees

AB 51 sought to prevent the use of arbitration clauses in employment to protect the rights of employees under the provisions of the Fair Employment and Housing Act (FEHA).

AB 51 prohibits employers from requiring any employee or applicant to “waive any right, forum, or procedure for a violation of any provision” of FEHA or the entire Labor Code, including “the right to file and pursue a civil action” in “any court,” “as a condition of employment, or the receipt of any employment-related benefit.”

The law also prohibits employers from including arbitration agreements with the provision that employees can opt out. Under AB 51, an opt-out provision is just as restrictive to employees’ rights as a mandatory arbitration clause.

In 2000, the California Supreme Court ruled in Armendariz v. Foundation Health Psychcare Services, Inc. that an arbitration clause that is both procedurally and substantively “unconscionable” would not be enforceable. To be substantively “conscionable,” the court ruled that an arbitration clause would have to provide five rights or protections for the employees, including:

  • The employee would not bear any cost greater than if going to court
  • The employee would be allowed broad discovery rights
  • The employee would have access to the same type of relief as in a non-arbitration forum (court)
  • The employee would be given a written arbitration award notification, allowing for adequate judicial review
  • The employee would be guaranteed a neutral arbitrator

Armendariz thus set pretty high standards for employers to mandate arbitration for all workplace disputes.

Trust Your Legal Matters to a Professional

Arbitration clauses save employers the costs of lengthy courtroom battles and are often employer-friendly because of the “repeat-player advantage,” but they are becoming more and more difficult to enforce in California. As the battle over AB 51 plays out before the 9th U.S. Circuit Court of Appeals, the restrictions of the Armendariz case still set a high bar for employers to force arbitration on their employees.

If you’re an employer in the San Francisco Bay Area and neighboring communities of San Mateo, Oakland, San Jose, Santa Clara, and throughout Alameda County, rely on the Law Offices of David H. Schwartz, INC., to help you resolve any issues you have with your employment agreements, including arbitration clauses.

If you’re an employee who feels wronged by the use of mandatory arbitration, attorney David Schwartz can listen to your story, assess what happened, and advise you of your options going forward.


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