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  • Writer's pictureThakur Law Firm, APC

Arbitration Agreements: What Every California Employer Needs to Know

When it comes to employment arbitration in California, the laws are constantly changing, putting employers at risk of having to litigate over the enforceability of their arbitration agreements. In this blog, Thakur Law Firm will discuss crucial information California employers need to know regarding arbitration agreements. If you are in need of a business law and litigation lawyer, contact us today.

One significant change occurred in 2019 when the state tried to ban mandatory employee arbitration agreements, signing California Assembly Bill AB 51 into law which went into effect in 2020.

But a case recently decided in February 2023, the Ninth Circuit in Chamber of Commerce v. Bonta held that AB 51 went against the Federal Arbitration Act (FAA) and is thus unenforceable. That puts mandatory employee arbitration agreements back on the table for California employers – with a catch. To be enforceable, an employer’s mandatory arbitration agreement must fall under the FAA.

The FAA does not apply to “transportation workers” who engage in foreign or interstate commerce. Therefore, companies that employ these types of workers may not be able to enforce mandatory arbitration agreements. However, other types of employees can now be held to mandatory arbitration agreements in California. But that’s not all. Additional court decisions have strengthened the rights of employers to enforce arbitration agreements, including a case last year that overruled a decision from 2014.

New Law Overturns Employer Limits on PAGA Actions

In the case of Iskanian v. CLS Transport. Los Angeles, LLC decided back in 2014, a California court held that employers could not divide PAGA claims into individual and non-individual claims through employee arbitration agreements.

The California Private Attorneys General Act (PAGA) allows employees to file lawsuits against their employers on behalf of themselves, other employees, and the State of California, for California Labor Code violations. The act of dividing PAGA claims into individual arbitration claims is called a representative action waiver.

Since Iskanian, California courts have consistently rejected employers' attempts to enforce agreements that allowed for arbitration of PAGA claims for labor code violations individually.

However, in a recent 2022 case, Viking River Cruises, Inc. v. Moriana, the U.S. Supreme Court issued a ruling in which they found that the FAA superseded the California Supreme Court’s interpretation of PAGA. This meant that an employee plaintiff who has a PAGA claim against their employer but is subject to an arbitration agreement that requires individual arbitration of any claim may be forced to individually arbitrate their PAGA claim for labor code violations.

The U.S. Supreme Court explained that PAGA claims can be divided into individual and non-individual claims, and the employer can compel the employee to individually arbitrate their PAGA claims because they had agreed to arbitrate their claims against the employer individually. As a result, the plaintiff’s non-individual PAGA claims must be dismissed because they would no longer have standing to bring a PAGA action on behalf of other employees in California. However, the Court also noted that the FAA does not supersede PAGA or the California Supreme Court’s previous ruling that whole waivers of PAGA claims are invalid.

This ultimately means that, for now, carefully crafted arbitration agreements by employers requiring employees to individually arbitrate their claims, thereby limiting the scope and cost of defending a representative PAGA action, will be enforced. This is a valuable win for employers in California.

The Importance of Details in Employee Arbitration Agreements

Simply placing arbitration provisions into employee handbooks and coupling them with signed acknowledgment forms does not necessarily establish an enforceable agreement to arbitrate.

In another 2022 case, Mendoza v. Trans Valley Transp., the California Supreme Court explained that employee handbooks were solely meant to be informational and not contractual. But even if it was found to be contractual, the Court further held that if nothing in the employee handbook explicitly drew the employee’s attention to the arbitration provision or distinguish it from other provisions in the handbook, then the arbitration provision was unenforceable.

Given the above, it would be best practice for employers to use separate arbitration agreements with employees. This approach also has the added advantage that in the event of litigation, only the separate arbitration agreement would need to be entered into the public record in order to compel arbitration, rather than the entire employee handbook itself.

Making Timely Payment for Arbitration Fees in California

California courts have also recently confirmed the two newly added provisions in the California Arbitration Act (CAA) that requires an employer to pay its share of arbitration fees within 30 days of the date they’re due or else the employer would be found to be in material breach of the arbitration agreement. If this breach occurred, the other party involved in arbitration could withdraw their claims and take legal action instead.

In De Leon v. Juanita's Foods (2022), the California Court of Appeal confirmed that this new law was an inflexible rule, meaning courts could not deviate from the finding of a material breach.

What does that mean for employers? When it comes to arbitration fees, employers must make timely payments if they want to compel an employee's dispute into arbitration or else relinquish their right to compel the employee to proceed with arbitration.

Arbitration Enforced Like Contract by Federal Courts

The 2022 Supreme Court decision in Morgan v. Sundance, Inc. reinforces how federal courts view arbitration agreements: the same as any other contract between two parties.

In Morgan, an employee signed an arbitration agreement when they applied for their job. Later, the employee filed a civil action against their employer in federal court. Despite the arbitration agreement, the company engaged in a federal lawsuit, filing motions in their defense while concurrently engaging in mediation efforts.

Eight months after the lawsuit was filed, the company petitioned to force arbitration under the employee’s agreement and FAA rules. The employee argued that arbitration should be off the table because the company had engaged in litigation for so long. The court held that the employer can compel arbitration based on their contractual agreement with the employee, even if they didn’t initially enforce arbitration.

The Court reasoned that if they had sided with the employee, the Court would have had to create a new procedural rule around arbitration agreements. Essentially, the Court determined that it was not in its place to create additional rules around arbitration. Instead, courts must simply enforce arbitration agreements similar to contracts and that there was nothing in the arbitration agreement that voided the company’s right to compel arbitration, even if the company engaged in litigation.

Closing Thoughts

Employers must stay ahead of the game and ensure their arbitration agreements are compliant with California's strict requirements. Engaging a law firm with expertise in drafting enforceable arbitration agreements is crucial to safeguard your business interests. By partnering with a knowledgeable legal team, you can secure your agreements and protect your organization from potential legal disputes. Don't hesitate to reach out to us for assistance; our experienced attorneys are here to help.

Contact Thakur Law Firm, APC at (714) 772-7400 or to schedule a consultation and learn more about how we can support your business in drafting enforceable arbitration agreements.


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