Arbitration Agreements in California Employment: What Employees Need to Know

Overview

Arbitration agreements are increasingly common in employment contracts. These agreements require employees to resolve workplace disputes through arbitration rather than court proceedings. Understanding what arbitration agreements are, how they work, and what rights you have is critical to protecting your employment rights.

Arbitration agreements have become one of the most litigated employment issues in California. This is because the law governing arbitration agreements comes from multiple sources: federal law (the Federal Arbitration Act), California law (including statutes and common law), and California case law. The interplay between these sources creates a complex and evolving landscape.

This guide explains arbitration agreements in the context of California employment law. It does not constitute legal advice.

How Arbitration Agreements Work

What is Arbitration?

Arbitration is a private alternative to litigation. In arbitration, a neutral third party (called an arbitrator) hears evidence from both sides and renders a binding decision. Rather than filing a lawsuit in court, employees resolve disputes through this private process.

Mandatory vs. Voluntary Arbitration

Mandatory arbitration agreements require employees to arbitrate all claims that arise out of employment. These agreements typically state that the employee waives the right to bring a case in court or before an administrative agency. Mandatory arbitration is common, particularly in large employers, financial services firms, and technology companies.

Voluntary arbitration occurs when an employee chooses to arbitrate a dispute after it arises. This is different from a pre-employment agreement requiring arbitration.

Pre-Dispute Agreements

Most employment arbitration agreements are pre-dispute agreements - they are signed before any dispute has arisen. The employee signs an agreement at the time of hire (or as a condition of continued employment) committing to arbitrate any future disputes with the employer.

Class Action Waivers

Many arbitration agreements include class action waivers, which prevent employees from bringing or participating in collective lawsuits or class actions. Instead, employees must bring their claims individually in arbitration. This dramatically affects the economics of bringing certain claims (such as small wage and hour violations or discrimination claims) because the cost of arbitration may exceed the amount in controversy for individual employees.

Federal Arbitration Act Preemption

The Federal Arbitration Act

The Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq., is a federal statute that makes arbitration agreements "valid, irrevocable, and enforceable." The FAA applies to arbitration agreements affecting interstate commerce, which includes virtually all employment arbitration agreements.

Preemption of State Law

The U.S. Supreme Court has interpreted the FAA to preempt most state-law restrictions on arbitration. This means that even if California law would limit or prohibit an arbitration agreement, the FAA may override that state law. The Supreme Court's position is that arbitration agreements must be treated the same as other contracts, and cannot be singled out for disfavor.

Savings Clause

However, the FAA includes a "savings clause" that allows states to apply general contract law principles (such as unconscionability, lack of mutual assent, and fraud) to arbitration agreements. California has used this savings clause to apply defenses that make some arbitration agreements unenforceable, particularly when they are unconscionable or lack essential protections for employees.

California's Efforts to Restrict Mandatory Arbitration

Assembly Bill 51 (Labor Code § 432.6)

In 2002, California enacted Assembly Bill 51, which amended California Labor Code Section 432.6. This law made it unlawful for an employer to require an employee as a condition of employment to waive any right under California law or to waive the right to file an administrative complaint with a government agency. The statute appeared to prohibit mandatory arbitration agreements in employment.

However, the law faced significant legal challenges. In 2001 (before AB 51's effective date), the Ninth Circuit Court of Appeals held in Circuit City Stores, Inc. v. Adams, 279 F.3d 889 (9th Cir. 2001), that the FAA preempted California's previous ban on employment arbitration agreements. The court concluded that AB 51 was preempted by the FAA and could not be enforced as written.

Subsequent Litigation and the Ninth Circuit

Following the Circuit City decision, AB 51 remained on the books but became largely unenforceable in federal court due to FAA preemption. California courts have recognized that federal law generally requires enforcement of arbitration agreements in employment, even when California law would prefer to restrict them.

The effect is that mandatory pre-dispute arbitration agreements are generally enforceable in California, provided they meet certain requirements (discussed below under the unconscionability doctrine).

Unconscionability Doctrine

The Armendariz Framework

While federal law generally enforces arbitration agreements, California has used the doctrine of unconscionability to limit enforcement of arbitration agreements that are one-sided or unfair. The landmark case is Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000).

In Armendariz, the California Supreme Court held that arbitration agreements in employment are enforceable, but only if they comply with California contract law. The court identified two types of unconscionability:

• Procedural unconscionability - occurs when the agreement is imposed on the employee in a manner that is oppressive or surprising. Factors include whether the agreement was presented on a take-it-or-leave-it basis, whether the employee had a meaningful opportunity to understand the terms, and whether the employee had bargaining power.
• Substantive unconscionability - occurs when the terms of the agreement are unreasonably favorable to the employer. For arbitration agreements, the court identified minimum requirements that must be met for the agreement to be enforceable.

Minimum Requirements for Enforceable Employment Arbitration

According to Armendariz, an arbitration agreement must include the following minimum substantive requirements to be enforceable in an employment context:

• Neutral arbitrator. The arbitration agreement must provide for a neutral arbitrator, not one selected by the employer.
• Adequate discovery. The agreement must allow adequate discovery for the employee to litigate the claim effectively. While discovery in arbitration may be less extensive than in court litigation, it must be sufficient to make the arbitration a fair substitute for a judicial forum.
• Written decision and statement of reasons. The arbitrator must provide a written decision and the reasons for the decision. This allows the employee to understand why the arbitrator decided against them and is necessary for any appeal or judicial review.
• All remedies available. The arbitration agreement must provide that the employee can recover all remedies otherwise available in court under the law, including compensatory damages, penalties, and attorney's fees. The agreement cannot limit the employee to a lesser recovery than would be available in court.
• Employer must pay costs. The employer must pay all costs of arbitration that would not be required in court, including the arbitrator's fees and administrative costs. Requiring an employee to pay these costs may be prohibitively expensive and prevent the employee from bringing a claim.

Application of Unconscionability Doctrine

Many arbitration agreements have been found unenforceable because they violate one or more of these Armendariz requirements. For example, courts have found unconscionable agreements that:

• Limit the remedies available to the employee below what would be available in court
• Require the employee to pay arbitration costs
• Limit discovery to such an extent that the employee cannot effectively litigate the claim
• Allow the employer to terminate or modify the arbitration agreement unilaterally

Class and Collective Action Waivers

The Traditional Ban on Class Waivers

For many years, California courts held that class action waivers in employment arbitration agreements were unconscionable and unenforceable, particularly for wage and hour claims. The rationale was that many wage and hour violations are small in amount, and requiring each employee to arbitrate individually would be prohibitively expensive and would prevent effective vindication of statutory rights.

Viking River Cruises v. Moriana (2022)

However, in 2022, the U.S. Supreme Court held in Viking River Cruises, Inc. v. Moriana, 142 S.Ct. 1901 (2022), that class action waivers in arbitration agreements do not violate California's rule against unconscionable agreements. More significantly, the Court held that class action waivers are enforceable even for claims under the Private Attorneys General Act (PAGA).

Impact on PAGA claims. PAGA, found in California Labor Code Section 2698 et seq., allows employees to sue on behalf of the state for violations of California's labor laws. Under Viking River Cruises, an employee cannot avoid the class action waiver by bringing a PAGA claim instead of a class action. The arbitration agreement's waiver of representative actions applies to PAGA claims as well.

This decision has significantly limited the practical use employees have in wage and hour cases, as individual arbitration of small wage violations is often economically impractical.

California Legislative Response

Following the Viking River Cruises decision, California has considered additional legislation to address the enforceability of class waivers and PAGA waivers. However, such legislation faces significant preemption challenges under the FAA, and it is unclear whether new restrictions would survive federal constitutional scrutiny.

Advantages and Disadvantages of Arbitration for Employees

Potential Advantages

• Speed. Arbitration is generally faster than litigation. Cases can be resolved in months rather than years.
• Confidentiality. Arbitration proceedings are typically confidential, which may preserve privacy.
• Expertise. Parties can select arbitrators with industry expertise relevant to the dispute.
• Finality. Arbitration awards are final and binding with limited grounds for appeal, which provides certainty.

Significant Disadvantages

• Limited discovery. Discovery in arbitration is typically more limited than in litigation, making it harder to obtain documents and deposition testimony from the other side.
• No jury trial. Arbitration is decided by a single arbitrator, not a jury. Some employees prefer the option of presenting their case to a jury.
• Limited appeal rights. Arbitration awards are final and may be overturned only in narrow circumstances (such as fraud, corruption, or exceeding authority). There is no right to appeal on the merits.
• No precedent. Arbitration decisions do not create precedent and are not published, so they do not help other employees facing similar issues.
• Cost. Even if the employer pays arbitrator fees, there are often attorney's fees and costs involved that make small claims uneconomical.
• Class action waiver. Many arbitration agreements include class action waivers, preventing collective action and making wage and hour claims particularly difficult to bring.

What to Look For in an Arbitration Agreement

Key Provisions to Review

If you are presented with an arbitration agreement, consider the following:

• Scope of claims covered. Does the agreement require arbitration of all employment-related claims, or only certain claims? Some agreements carve out certain claims (such as claims that cannot be arbitrated under law, or claims for injunctive relief).
• Confidentiality requirements. Are you prohibited from discussing the arbitration or its results? This can prevent coordination with other affected employees.
• Cost allocation. Who pays the arbitrator's fees and administrative costs? The employer should pay all costs beyond what would be charged in court.
• Discovery limitations. Are there limits on discovery? Is there a cap on the number of depositions or document requests?
• Remedies. Does the agreement state that all remedies available at law or in equity are available in arbitration?
• Class action waiver. Does the agreement include a class action or representative action waiver? This is a critical provision that may limit your ability to join with others.
• Statute of limitations. Does the agreement impose a shorter statute of limitations for bringing claims? California law generally does not allow this.
• Selection of arbitrator. How is the arbitrator selected? Is there a neutral process, or does one party have greater control?
• Modification and termination. Can the employer unilaterally modify or terminate the agreement? The agreement should require mutual consent to any changes.
• Venue and applicable law. Where will arbitration take place? What law will govern?

Red Flags

The following provisions may render an arbitration agreement unconscionable or unenforceable:

• Employer pays no arbitration costs or requires employee to pay all costs
• Severely limited discovery (such as no depositions or document exchange)
• No written decision by the arbitrator
• Arbitrator selected solely by the employer
• Remedies limited below what would be available in court
• One-way attorney's fees provision (employee must pay employer's fees if unsuccessful, but employer's fees are not addressed)
• Unilateral modification rights for the employer only

Can You Refuse to Sign?

Practical Considerations

Technically, you can refuse to sign an arbitration agreement. However, there are practical limitations:

• Condition of employment. Many employers require employees to sign an arbitration agreement as a condition of employment or continued employment. Refusing to sign may result in not being hired or being terminated.
• Legal validity of conditions. While employers can lawfully require arbitration agreements (subject to the unconscionability doctrine), they cannot require waiver of rights that cannot be waived by law. For example, an employer cannot require an employee to waive the right to file a charge with the California Civil Rights Department (CRD, formerly DFEH) or the federal EEOC.
• State-specific protections. Some states have placed greater restrictions on mandatory arbitration. However, in California, federal law (the FAA) generally allows employers to require arbitration as a condition of employment.

What If You Are Presented With an Agreement at Work?

If you are presented with an arbitration agreement:

• Take time to read and understand the agreement before signing. Do not rush.
• Ask your employer for a copy to review before signing.
• Consider consulting with an employment law attorney before signing.
• Make note of the date you signed and keep a copy for your records.
• Do not sign a blank agreement or one with missing provisions.

Conclusion

Arbitration agreements are enforceable in California, but they are subject to significant limitations. Federal law (the FAA) strongly favors arbitration, but California law requires that arbitration agreements meet minimum fairness standards. The unconscionability doctrine, as developed in Armendariz and subsequent cases, protects employees from oppressive or one-sided agreements.

The law governing arbitration agreements is complex and evolving, particularly following the Supreme Court's decision in Viking River Cruises, which limited California's protection against class action waivers. Employees should carefully review any arbitration agreement before signing and should consider consulting with an employment law attorney if they have questions about the enforceability or fairness of the agreement.

This guide is provided for general informational and educational purposes only. It does not constitute legal advice, and no attorney-client relationship is created by reading this material. Laws and regulations may change, and the application of law depends on the specific facts of each situation. Consult a qualified attorney for advice regarding your particular circumstances.