Autumn Cleaning: It’s Time for Employers to Dust Off their Arbitration Agreements and Make Changes in Light of Appellate Decisions Last Summer


To assure that arbitration agreements with employees continue to align with employers’ intentions, California employers should review and modify the agreements in light of recent rulings by federal and state appellate courts. Among other things, employers should consider making the following changes:

  1. If an employer wants a court rather than an arbitrator to decide whether the arbitration clause permits class action claims to be arbitrated, the clause should explicitly allocate the responsibility for that decision to the court.
  2. If the employer wishes to avoid the arbitration of class claims, its arbitration agreement with its employees should provide that, if a court or arbitrator determines that a class action waiver in the arbitration agreement is void, the entire arbitration agreement is void and such claims will be adjudicated in court. Arbitration clauses should explicitly state that the parties’ intention is that no class claims be adjudicated through arbitration; any such claims, to the extent they are unwaivable, must be adjudicated in court.
  3. Where a company’s arbitration clause is in its employee handbook, the clause should be stated separately as an appendix to the handbook, and the company should include a written acknowledgement of receipt of the handbook (to be signed by the employee) that states that continued employment after receipt of the handbook constitutes knowing and voluntary consent to the arbitration provision.

These changes in the terms of arbitration agreements with employees are important, because of the following appellate decisions during the summer of 2016:

In Morris v. Ernst & Young LLP, __ F.3d ___, 2016 WL 4433080 (9th Cir. Aug. 22, 2016), the Court of Appeals held that a class action waiver in an arbitration clause violates sections 7 and 8 of the National Labor Relations Act (“NLRA”) and is unenforceable. The Court focused on the waiver and not the context (arbitration or litigation) in which the agreement said the waiver would apply. The Court explained that such a waiver is unenforceable whether in litigation or arbitration, because section 7 establishes the substantive right for employees to engage in concerted activity regarding the terms and conditions of employment; concerted activity includes concerted legal claims in any forum; and the NLRA forbids “a ban on initiating, in any forum, concerted legal claims.” According to the Court, because this application of the NLRA does not prohibit or inhibit arbitration, it does not conflict with the Federal Arbitration Act, which strongly favors enforcement of arbitration agreements.

The Morris Court did not decide whether arbitration of class claims would be appropriate in that case; it remanded the case to the trial court to make that determination. However, the Court did comment: “Arbitration between groups of employees and their employers is commonplace in the labor context. It would no doubt surprise many employers to learn that individual proceedings are a ‘fundamental’ attribute of workplace arbitration.” Employers need to be cautioned that, if a trial court is determining whether class claims may be arbitrated where the arbitration agreement is silent on that issue, the court may, in determining the parties’ likely expectations, take into consideration this “commonplace” fact to support a conclusion that the agreement authorizes class arbitration.

In Sandquist v. Lebo Automotive, Inc., 1 Cal.5th 233 (2016), the California Supreme Court addressed how an arbitration agreement that was silent on the issue allocates the responsibility to determine whether class claims may be arbitrated. The Court relied in part on the parties’ “likely expectations” in entering into the agreement that the resolution of their dispute would occur with no contact with the court, to determine that agreement allocated that responsibility to the arbitrator. In Sandquist, three pre-printed arbitration clauses that an employee had to sign his first day of work, while under time pressure to start work, did not clearly state whether the court or the arbitrator would determine whether class claims would be submitted to arbitration. All three documents contained inclusive language about the claims relating to the employment relationship that needed to be submitted to arbitration. Two of the three documents excluded some issues – but not the issue of whether class claims could be arbitrated – from arbitration. In light of this ambiguity, the Court applied principles of contractual interpretation, including the parties “likely expectations” noted above. The other two principles of contract interpretation the Court considered were (1) the state and federal law principle that, when allocation of a matter to arbitration or to the courts is uncertain, “we resolve all doubts in favor of arbitration,” and (2) the California legal principle that ambiguities in a contract are construed against the drafter, particularly in the context of an adhesion contract. Applying these principles, the Court noted that the employer could have prepared a clause “that explicitly addressed any unstated desire to have the availability of class arbitration resolved by a court . . . . It did not.”

California law contains no presumption that the issue of the availability of class action arbitration must be decided by the court. If it did have such a presumption, it would be preempted by the FAA, which contains two presumptions – one, that parties intend courts to determine disputes about arbitrability (i.e., “gateway” issues), and, two, that parties intend arbitrators to decide disputes about the meaning and application of procedural preconditions for the use of arbitration. The Court stated that the issue of whether class action arbitration is forbidden does not involve either the validity of the arbitration clause or its applicability to the parties’ dispute. Rather, it involves the issue of what kind of arbitration proceeding the parties agreed to, and the presumption applicable to that issue is that the parties intended the arbitrator to decide. Two other principles under the FAA favored the interpretation that the arbitrator should decide whether class action arbitration was available: (1) the presumption that arbitrators decide this issue is more consistent with the desire for expeditious results, and (2) any doubts about the scope of arbitrable issues should be resolved in favor of arbitration.

In Esparza v. Sand & Sea, Inc., __ Cal.App.4th __, 206 Cal.Rptr.3d 474 (Aug. 22, 2016), the California Court of Appeal held that an arbitration clause in an employee handbook that was prefaced with the statement that the “handbook is not intended to be a contract, . . . nor is it intended to otherwise create any legally enforceable obligations on the part of the Company or its employees,” was unenforceable against the employee. While the employee signed an acknowledgment of receipt of the handbook, and the acknowledgment mentioned the arbitration provision as one of the company’s “policies, practices and procedures,” the acknowledgment explicitly recognized that the employee had not yet read the handbook, and it did not say that the employee agreed to the arbitration provision. The court used general principles of contract interpretation to come to this conclusion. It contrasted this arbitration provision with that in Harris v. TAP Worldwide, LLC, 248 Cal.App.4th 373, 379, where the Court held enforceable an arbitration provision that was attached as an appendix to the employee handbook, in which there was a statement that, if the employee continued to work at the company, he would be deemed to have knowingly and voluntarily consented to the arbitration provision.

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