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08 . 24 | Employment Law

Are Arbitration Clauses and Agreements Enforceable?

Employers favor arbitration clauses because they avoid litigation that costs employers time and money. These agreements require any employee dispute to be settled through an arbitration process outside of court. And, under the 1925 Federal Arbitration Act, the plaintiff gives up the right to appeal the arbitration decision in court.

However, a new arbitration agreement regulation in California that took effect September 2021 stops employers from requiring new hires or existing employees to sign an arbitration agreement as a condition of employment.

The new California law is found in Labor Code Section 432.6 and dates back to January 1, 2020, its original effective date before it was appealed in the 9th Circuit Court, which partially upheld the new law.

Exceptions to the new law are:

  • Any arbitration agreements signed prior to January 1, 2020 remain in full effect.
  • Any arbitration agreement an applicant or employee enters into voluntarily after January 1, 2020.

However, there are pre-existing rules in California under the California Arbitration Act of 2000 that help protect employees who signed arbitration clauses before January 2020. Under this Act, arbitration agreements must follow the Armendariz standards.

The Armendariz standards set forth the minimum standards fairness that any employment pre-dispute arbitration agreement must meet to be enforceable. So under the Armendariz standards, an arbitration agreement will not be enforced in California if it is both “procedurally unconscionable” and “substantively unconscionable.”

In addition, under the Armendariz standards, any arbitration agreement that is mandatory as a condition of employment is automatically considered procedurally unconscionable. So, for an arbitration agreement to be enforceable in California, its substantive provisions must not be unfair to the employee.

  • Arbitration agreements must not be one-sided, meaning the employer must also be required to arbitrate disputes.
  • Arbitration agreements must not limit any substantive rights that an employee would have had in litigation if the dispute were decided there.
  • Arbitration agreements must not impose any added costs or fees on an employee that would not have applied in litigation.

So, what makes an arbitration agreement procedurally unconscionable and substantively unconscionable?

  • Procedurally unconscionable agreements are presented in an unfair, surprising, or oppressive way. For example, in a 2019 California Supreme Court case, OTO v. Kho, the court ruled that the arbitration clause in the employment contract was procedurally unconscionable to an “unusually high degree” because it was presented in a large dense, single-spaced, paragraph filled with long sentences, legalese and case law references in a very small text font.
  • Substantively unconscionable agreements are overly harsh, one-sided or unfair. For example, the terms may include a strict statute of limitations or discovery provisions. (DeLeon v. Pinnacle Property Management).
  • In California, an arbitration agreement is unenforceable if it is both procedurally and substantively unconscionable.

Resolving employer-employee disputes can be a hostile process. At the same time, state and federal laws on arbitration agreements are subject to change and scrutiny by legislators. Having a skilled employment attorney on your side can make the difference when questioning whether an arbitration clause will hold up in court. Call LawPLA at either of our Los Angeles offices or contact us online to schedule a consultation today.

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