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As an employer, the threat of potential litigation with prospective, current or former employees always looms.  Litigation can be an uncertain and time-consuming process which can drain valuable resources from a company.  This is why many employers have included arbitration agreement provisions in their employment contracts.  But several recent California cases have demonstrated how important it is for employers to include all key terms of an arbitration agreement into the employment contract to ensure that a California court will enforce it.

Arbitration vs. Litigation

Litigation is the process of bringing a suit in court, in which the court will issue a judgment that that can ordinarily be appealed.  Arbitration is a form of alternative dispute resolution where the disputing parties typically agree to be bound by the decision of one or more neutral arbiters.  There are several advantages to choosing arbitration over litigation:

  • Faster resolution of claims
  • Not as uncertain as a case where jury sentiment may sway a decision adverse to the employer
  • Exclusionary rules of evidence are not as strictly enforced (evidence is  ordinarily admissible if it is relevant and non-cumulative)
  • Confidentiality is required of the arbitrator and can be imposed by agreement on the parties, their experts and attorneys
  • Less exposure to punitive damages
  • Arbitration decision is final and there is no right of appeals to the courts to change the award

The Gorlach and Elijahjuan Decisions

California Code of Civil Procedure section 1281.2 states that for a court to order the parties to arbitrate the controversy, it must determine that an agreement to arbitrate the controversy exists.  Two recent cases have demonstrated that California courts narrowly interpret arbitration agreements to apply only to the express terms of the agreement.  In Gorlach v. The Sports Club Co., a human resources director sued her former employer for wrongful termination, retaliation, sexual harassment, defamation, breach of contract, and negligence.  The employer moved to compel arbitration pursuant to a provision in their employer-employee handbook.   However, the employee, prior to resigning her position, managed to conceal from her employer that she was one of several employees who had yet to sign the arbitration agreement. The Court refused to order arbitration, finding that (1) there was no explicit agreement to arbitrate in the absence of a signed arbitration agreement by the employer and employee; (2) no implied agreement on the part of the employee to arbitrate, as the arbitration clause in the company handbook did not make arbitration of employer-employee disputes a condition of employment; and (3) the employer did not have a reasonable belief that the employee had in fact signed the agreement when so many employees had yet to return their signatures.

In Elijahjuan v. Superior Court, a California Court of Appeal held that owner-operator truck drivers were not required to arbitrate whether they were misclassified as independent contractors where the parties’ arbitration agreements applied to any dispute that arose “with regard to its application or interpretation.”  The Court did not compel the parties to arbitrate because it found that the arbitration agreements were not broadly construed to cover any and all claims arising out of the parties’ employment relationship.

Conclusion

Two important considerations should be taken away from the Gorlach and Elijahjuan decisions.  First, employers must ensure that employees actually sign arbitration agreements.  Employers should develop a system of internal audits to ensure that all employees have signed arbitration agreements.  As evidenced in Gorlach, California courts have taken the stance that employers, not the employees, must ensure that all employees have expressly agreed to arbitration provisions as part of their employment.  Second, employers should ensure that any employee arbitration agreement clearly states that it applies to any claim regarding the relationship of the parties.

Remember, mandatory arbitration of employer-employee disputes arising out of an employer-employee relationship is permitted in California.  However, in order for the arbitration agreement to be enforced  in California state court (1) the arbitration agreement must afford the employee all relief and damages the employee would be entitled to claim and recover under California’s Fair Employment  and Housing Act (“FEHA”) if suing in court; (2) the arbitration agreement must provide for discovery sufficient for employees to adequately arbitrate their claims; (3) there must be a written arbitration decision and permitted judicial review of the decision by a trial court; and (4) the arbitration agreement does not require employees to pay unreasonable costs or any arbitrator’s’ fees as a condition to arbitrate.

Contact the Law Office of George G. Romain if you have an employment arbitration agreement you want reviewed or prepared.  Your rights depend on it.

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