Arbitration is seen as a silver bullet – a judicial forum that is more sympathetic to business than a jury, and one that is presumably more cost-effective when compared to litigation. In reality, arbitration is not necessarily the employer’s preferred alternative to litigation of a claim.
There are studies which claim that arbitration is advantageous to the employer because it reduces the cost of litigation and the size of an award that an employee might otherwise receive from a jury. There may also be some tendency by arbitrators to “split the difference” between the parties to avoid a win-lose situation in arbitration. Employers with a strong defense to an employee claim, who seek a decisive victory, may not be satisfied with an arbitrator’s unexpected willingness to compromise. In an employment dispute, a compromise decision by an arbitrator will likely include an award of statutory attorney fees to Plaintiff’s counsel, dramatically increasing the employer’s financial exposure. In addition, in California, employers are required to pay ALL costs unique to arbitration of employment disputes. This can represent another significant, hidden cost to small employers who select this alternative.
Arbitration of employment disputes in California is also subject to numerous restrictions. To withstand judicial scrutiny, employment arbitration agreements in California must be carefully drafted or they will not be enforced.
The California Supreme Court has repeatedly stated that arbitration agreements are subject to certain minimum requirements: 1).The arbitration agreement may not limit damages available by statute; 2). There must be discovery sufficient to adequately arbitrate the statutory claim; 3). There must be a written arbitration decision and judicial review sufficient to ensure that the arbitrators comply with the requirements of the statute; and 4). The employer must pay all costs that are unique to arbitration. Gentry v. Superior Court (2007) 42 Cal. 4th 443, 456-457, 165 P.3d 556; Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal. 4th 83, 99 Cal. Rptr. 2d 745.
Tort claims, such as claims for damages for intentional infliction of emotional distress, and contract claims, including claims for wrongful termination, are subject to arbitration. So too are Title VII, ADEA, and FEHA claims for employment discrimination. However, the National Labor Relations Board may consider it an unfair labor practice if an employer’s arbitration agreement interferes with the employee’s right to file charges with that Agency. Under certain circumstances, class action waivers in arbitration agreements may not be enforceable in California. California Labor Code § 229 states that actions to collect due and unpaid wages “may be maintained without regard to the existence of any private agreement to arbitrate.” California Labor Code § 1194 establishes a private right of action to enforce violations of minimum wage and overtime laws, “notwithstanding any agreement” to the contrary.
Applying general contract principles, California Courts will also jettison one-sided, arbitration agreements that obligate only the employee and not the employer as unconscionable contracts that lack mutuality of obligation.
Finally, the timing of an arbitration agreement may also determine its enforceability. Enforceable agreements are typically included as part of an employment application or in an employment handbook, for which the employee signs to acknowledge receipt. Where the employer institutes a compulsory arbitration program for current employees, the employees’ signed acknowledgement to continue working after receipt of notice may also constitute consent to be bound by arbitration.
Understanding the inherent limits to arbitration of employment disputes in California will assist a small employer in its determination whether to utilize an employment arbitration agreement. Careful drafting of the language of that agreement will help insure that it can be enforced.