California possesses the reputation for posing special problems for employers doing business within the state. Not only are the employment rules complicated and extensive, but California juries are notorious for awarding extremely high verdicts against employers. Many employers believe that one way to avoid the risk of a high jury verdict is to require that their employees agree to arbitrate all disputes arising from their employment as a condition of their employment.
This assumption may no longer be valid. On August 24, 2000, the California Supreme Court, in Armendariz v. Foundation Health Psychcare Services, Inc., 2000 Cal.LEXIS 6120 (2000) held that mandatory employment arbitration agreements are enforceable in California (at least as to state law claims) provided they meet certain minimum requirements. These new requirements, however, have significant ramifications upon both the validity and the desirability of present employment arbitration agreements. As a result, all California employers with arbitration clauses in their employment contracts should review these clauses both to ensure compliance with Armendariz, and should consider whether, following Armendariz, they should scrap arbitration a mechanism for resolving employment disputes.
The Requirements of a Valid Employment Arbitration Agreement
In Armendariz, the plaintiffs were employees who had signed a specific employment agreement containing an arbitration clause. The arbitration clause provided that in exchange for employment, the employee agreed to arbitrate all employment termination disputes. The employer also agreed that in any such arbitrations, the employee’s remedies would be limited exclusively to back pay. The employee waived all other legal remedies, including rights to emotional distress and punitive damages and attorneys’ fees. Moreover, only the employee agreed to arbitrate claims; the employer was still free to file a legal action against the employee. The arbitration agreement also severely limited the parties’ rights to engage in discovery procedures during the arbitration.
The Supreme Court held that the arbitration clause at issue was unenforceable. It held that an arbitration clause cannot effect a waiver of substantive protections provided to employees under state statutes, and in particular, anti-discrimination statutes. To hold otherwise, the court opined, would permit private parties to contract to avoid the state’s public policy. Accordingly, the court held that, to be valid in California, an employment arbitration agreement must, at a minimum, contain the following elements:
- The arbitration agreement must provide for a neutral arbitrator. This requirement is fundamental. Even the one-sided agreement in Armendariz did not violate this requirement.
- The arbitration agreement may not limit statutory remedies. The arbitration agreement must permit employees to obtain the entire measure of remedies provided by law. In the case of discrimination claims, the clause must permit general damages, punitive damages, attorney’s fees and costs. An agreement that purports to limit an employee’s relief is not enforceable.
- The employee must be permitted to engage in discovery which is adequate to their arbitration claim. The court held that a valid arbitration clause must permit the employee to engage in essential discovery, including obtaining access to important documents and deposing witnesses.
- The arbitration agreement must provide for a written arbitration award and judicial review. The court held that to be valid, an arbitration clause must provide that the arbitrator issue a written decision that reveals the essential findings and conclusions upon which the arbitration decision is based.
- The arbitration agreement cannot provide for the sharing of the arbitration costs; employees may only be required to pay the cost of bringing a similar action in a judicial forum. The court held that employees “may not be required to bear any type of expense that the employee would not be required to bear if he or she were free to bring the action in court.” Thus, as a practical matter, employers must “pay all types of costs that are unique to arbitration.”
- The arbitration agreement must provide for mutuality between the parties. The court held that because mandatory employment arbitration agreements are generally adhesion contracts, to be enforceable, they must be mutual. Thus, if an employer wishes to force all claims arising out of an employee’s employment into arbitration, the employer must place a similar limitation on itself. The employer may not carve out exceptions to the arbitration process solely for its own benefit, such as providing a right for the employer to seek judicial remedies against the employee for the theft of trade secrets or unfair competition.
- Thus, the California Supreme Court’s decision in Armendariz, while affirming the concept of arbitration in employment contracts, should, because it imposes new requirements for arbitration clauses, and because it substantially reduces the benefits of arbitrating employment claims in California, encourage employers to reexamine both the validity and the desirability of mandatory arbitration clauses in their employment contracts.
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