Navigating Arbitration Agreements: Guidance for California Employers

Drafting an enforceable arbitration agreement in California demands a nuanced understanding of both state-specific and federal laws. The legal landscape surrounding the content and enforceability of arbitration agreements in the Golden State is in a constant state of flux. Nevertheless, certain best practices can help maximize the likelihood that these agreements will be enforceable.

Emphasizing Clarity and Separation

The employer’s arbitration agreement and employee handbook should be separate and distinct from one another. This separation helps to underscore the arbitration agreement's significance. Furthermore, it is advisable to provide a distinct, concise, and prominently highlighted title for the arbitration agreement. This ensures that there is no room for misunderstanding regarding the document under review and agreement. This theme of simplicity and separation should permeate the entire agreement, making each section easily discernible and understandable.

In cases where employees in California do not speak English as their first language, it is critical to have the arbitration agreement (and any employment agreement) translated appropriately, leaving no ambiguity as to whether the employee fully comprehends the terms and conditions of the agreement they are signing.

In addition to keeping the arbitration agreement separate from the employee handbook, a recent ruling also suggests that employers keep the agreement separate from any other agreement as well. In April of 2023, the California Court of Appeals reiterated the general rule that several papers relating to the same subject matter, presented together, and executed as parts of essentially one transaction, are to be interpreted together as one contract.¹ Thus, the Court concluded that the arbitration agreement and the separate confidentiality agreement (which contained improper terms and conditions prohibiting discussion of wages among other issues) should be read together as one document.

The Court relied on several factors in reaching this decision. The agreements (1) were executed on the same day in conjunction with one another, (2) were separate aspects of a single central transaction (new employee onboarding), and (3) both governed how to resolve employment-related disputes arising between the employee and the company. The Court then concluded that the unconscionable language within the separate confidentiality agreement rendered the arbitration agreement similarly unconscionable.

As such, it is best practice to first ensure that any agreement an employee will sign is valid. Second, ensuring that an arbitration agreement and any other employment agreement are presented under separate cover, in a separate format, and even, if possible, in a separate timeframe from other “onboarding documents,” is recommended.

Waiving Statutory Rights with Clarity

To reinforce the validity of the arbitration agreement, it should unequivocally convey that the employee is waiving specific statutory rights. Employers should employ bold or underlined text to underscore that employees are relinquishing their rights to seek redress in a courtroom and participate in class actions. For example:

"THE PARTIES UNDERSTAND AND AGREE THAT THEY ARE GIVING UP CERTAIN RIGHTS OTHERWISE AFFORDED TO THEM BY CIVIL COURT ACTIONS, INCLUDING BUT NOT LIMITED TO, THE RIGHT TO A JURY OR COURT TRIAL AND THE RIGHT TO BRING ANY CLAIM AS A CLASS OR COLLECTIVE ACTION. TO THE EXTENT A CLASS OR COLLECTIVE ACTION MAY NOT BE WAIVED, THE EMPLOYEE AGREES TO STAY ANY SUCH CLAIMS UNTIL AFTER ALL CLAIMS SUBJECT TO ARBITRATION ARE FULLY RESOLVED."

Clarifying the Who, What, Where, When, and How

Who: Parties should clearly outline the terms and conditions governing arbitrator selection and arbitration procedures. In California, many opt to defer to the selection rules of neutral organizations like the American Arbitration Association (AAA) or Judicial Arbitration and Mediation Services, Inc. (JAMS), as these organizations have readily available preset rules for arbitrator selection and proceedings.

What: Arbitration agreements should detail how discovery will be conducted, including the issuance of subpoenas for documents and witnesses, to prevent disputes and ensure a smooth arbitration process. The agreement should also delineate the kinds of motions and briefs permissible during arbitration and specify submission procedures. Moreover, the arbitration agreement should not limit the types of damages recoverable under FEHA, including back pay, front pay, general damages, punitive damages, reinstatement, and attorney's fees.

Employers also should ensure mutuality terms are included, requiring both parties to be subject to the same terms. The agreement may also incorporate a provision mandating confidentiality concerning the arbitral process and the outcome.

Where: In California there is little wiggle room for the arbitration venue for claims arising in California for employees who primarily reside and work within the state. With few exceptions, employers generally are prohibited from requiring adjudication of claims in venues or forums outside of California. This is critical for companies that may have headquarters based outside of California. 

When: Defining response timeframes for arbitration demands is essential for maintaining fairness and efficiency. Employers should also address the timing of the written arbitral decision to ensure parties understand the expected resolution timeline.

How: In California, employers are obligated to cover all arbitration-specific costs. Timely payment of arbitration fees is crucial, given the severe penalties outlined in Cal. Code Civ. Proc. Section 1281.97 for failing to meet payment deadlines within 30 days of the due date.

Critical Inclusions and Exclusions

Include - Class Action and PAGA Waivers: Arbitration agreements that incorporate class and representative action waivers can be invaluable. Employers should ensure the arbitration agreement has a foolproof class action waiver.

Further, recent legal decisions have clarified aspects of PAGA, such that arbitration of individual PAGA claims can now be enforced. Language pertaining to this within the arbitration agreement must be clear and not overly broad. So called “representative” PAGA actions should be excluded from the agreement. Employers should consider adding a severance clause with specific language related to PAGA claims to prevent disputes regarding the dismissal of non-individual PAGA claims. Additionally, employers should include language to ensure that litigation of representative actions is stayed until individual claims in arbitration are resolved.

Exclude - Sexual Harassment and Assault Claims: Recent changes in California's legal landscape, with the enactment of H.R. 4445, permit employees to invalidate pre-dispute arbitration agreements and class/collective action waivers for sexual harassment or sexual assault claims. Employers should adapt their agreements accordingly by excluding claims related to sexual assault and harassment from arbitration agreements. Similarly, employers should not attempt to include arbitration as it pertains to workers’ compensation and unemployment compensation claims.

Conclusion

Mastering mandatory arbitration agreements for employees in California demands a careful approach. Employers must prioritize clarity and separation to ensure employees fully comprehend the implications of these agreements. It is also crucial to remain vigilant regarding shifts in federal and state laws, particularly in sensitive areas like PAGA claims and sexual harassment and assault claims.

By adhering to best practices outlined in this article, among others, California employers can establish enforceable arbitration agreements. Given the complex nature of employment law in California, seeking legal counsel is strongly recommended to navigate these evolving legal standards.