Some Lessons for Employers on Arbitration Agreements

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Many employers have chosen to require employees to sign arbitration agreements, in which the employer and employee agree to arbitrate most employment disputes. As we discussed in our blog post on arbitration agreement issues, such a choice may or may not be optimal for a particular employer. But for those employers who wish to impose such a requirement, a recent court decision offers employers guidance on potential concerns that may arise in drafting and presenting employee arbitration agreements. (Note that we discuss specific issues with arbitration agreements in online applications elsewhere in this E-Update).

Make Sure the Provisions Are Mutual. In Ronderos v. USF Reddaway, Inc., the U.S. Court of Appeals for the Ninth Circuit upheld a lower court’s decision invalidating the employee’s arbitration agreement. The Ninth Circuit found that the agreement was both procedurally and substantively unconscionable – meaning under applicable state law that one of the parties lacked meaningful choice in deciding whether to agree and the contract contained terms unreasonably favorable to the other party. Among the problematic provisions included the following:

  • The filing provision was one-sided, in that it imposed a notice requirement on the employee, but not the employer, by which the employee must send the employer notice by using a particular form in a particular manner.
  • The filing provision also set a one-year statute of limitations for filing a claim that applied to the employee, but not the employer. The court also found issue with the fact that the one-year period was significantly shorter than the amount of time that employees typically have to bring employment-related cases. In addition, it deprived employees of the benefit of the continuing violations doctrine, in which employees can rely on related unlawful conduct that occurs outside the limitations period. And finally, the one-year period began to run from the date that the claim arose, rather than when the employee knew or reasonably should have known about the claim.
  • The agreement contained a carve-out for the employer – but not the employee – to go to court to obtain a preliminary injunction. The court shot down the employer’s arguments that the carve-out was only to prevent the employee from violating a confidentiality agreement or disclosing trade secrets (the carve-out identified those as examples, but did not limit its scope to those violations) and that employees do not require emergency injunctive relief (as many employment statutes authorize courts to grant employees such relief).

We suggest that employers make any such requirements mutual, to the extent possible, so as to avoid the contention that the agreement is unfair. As the Ronderos court noted, “not all one-sided terms are unconscionable, but the party seeking to enforce a one-sided term must provide at least some reasonable justification for such one-sidedness based on business realities.”

Think About How the Agreement Is Presented. In the Ronderos case, the court also found several procedural issues with the arbitration agreement, including the following:

  • The employee was required to sign the pre-printed arbitration agreement immediately as part of the job application process, without any chance to negotiate the agreement (aka a “contract of adhesion”). Although not illegal in and of itself, courts will scrutinize such contracts more closely to ensure overall fairness. But employers should consider whether such contracts are truly necessary for rank-and-file employees without bargaining power and without the education or experience to fully understand the agreement. They might also consider giving employees time to consult with an attorney regarding the agreement – even if most employees would not bother to do so.
  • The agreement’s cost-splitting provision was confusing and an unlawful surprise. The agreement stated that the costs of arbitration and arbitrator fees would be split equally – but a California law prohibits employers from requiring employees to pay such costs in an adhesion contract. While the agreement also contained a generic statement that the provision would not apply where “statutory provisions” required otherwise, there was no way for the employee to know that California law prohibited the 50-50 split – or that California law even applied to his contract, since there was no choice of law provision specific to the cost-splitting provision. As we noted in our blog post, employers should strongly consider paying the majority of any costs and fees.