Why it matters

Recent decisions from a National Labor Relations Board (NLRB) administrative law judge (ALJ) and a California appellate panel demonstrate the spectrum of approaches courts and regulators can take when considering arbitration agreements in the employment context. In the California case, the court affirmed a ruling that an employer's agreement was not unconscionable, noting that the employee was given the opportunity to consider the agreement, was not told by the employer that failure to sign it would result in repercussions, and the provisions at issue were clearly marked, not hidden or buried in the text. Taking an opposite stance, the NLRB ALJ invalidated an employer's arbitration agreement in a challenge brought by a worker who sought to represent a group of employees. The ALJ found that the employer's position that the agreement banned class and collective actions—and attempt to enforce such a prohibition—ran afoul of Section 7 of the National Labor Relations Act as employees could "reasonably believe" they were unable to file charges of unfair labor practices with the Board. In addition, the ALJ said he was bound by the D.R. Horton and Murphy Oil line of cases. Although he acknowledged that some courts have questioned the validity of the decisions, "[a]dministrative law judges must follow board precedent unless and until it is overruled by the Supreme Court," he wrote. "Under that precedent, it is unlawful for an employer to maintain and/or enforce a mandatory arbitration provision that, either on its face or as applied, precludes employees from pursuing employment-related claims on a class or collective basis in any forum."

Detailed discussion

When it comes to arbitration in employment agreements, the National Labor Relations Board (NLRB) and the California courts appear to be moving in different directions.

California has a long and complicated history with arbitration in the context of employment agreements, with multiple cases traveling from the state court system up to the U.S. Supreme Court and back.

But the courts have recently taken a friendlier approach to employers, most recently in a dispute involving a former residential property manager for J.K. Residential Services, Inc. Celestina Campos was provided with a two-page form in Spanish by J.K. Residential's third-party administrative services provider that included an arbitration clause on the bottom half of the second page.

Four paragraphs set out the arbitration agreement followed by the signature line with a statement that "The undersigned applicant agrees that he or she has knowingly and voluntarily waived his or her right to judicial resolution of any and all previously unasserted claims as that term is broadly defined in paragraph 1 above."

When J.K. Residential began working with a different administrative services provider, Campos was presented with an eight-page form in English. Four pages consisted of the employment agreement while tax forms made up the other half. One paragraph described the arbitration agreement between the parties with a single sentence in bold: "I and [administrative service provider] mutually waive any right to a jury trial."

Campos again signed the document. She later filed suit against her employer for failure to pay minimum wage or overtime compensation and other violations of state labor law. J.K. Residential moved to compel arbitration. Campos objected, arguing that the agreement was both procedurally and substantively unconscionable. She told the court that she was not told what was in the document or whether she had a choice to sign it or change it and that no one ever mentioned the word "arbitration" or that she gave up her right to go to court.

The employer countered that Campos testified in her deposition that no one told her not to read the agreements, prevented her from reading them, imposed a time limit for her review, or forced her to sign. She never asked about if she could negotiate the terms or whether she had a choice to sign the agreement, and no one told her she would not get the job if she did not sign or that she would be fired or disciplined if she did not sign.

A human resources manager for J.K. Residential also filed a declaration to explain that she met with employees—including Campos—about the agreement to review it and answer any questions, bringing a bilingual representative with her.

Denying the motion to compel arbitration, a trial court judge determined the two agreements were not adhesive but were procedurally and substantively unconscionable. The employer appealed.

In an unpublished opinion, a panel of the California appellate court reversed, ruling that the agreements were not procedurally unconscionable. Campos was not forced to sign any document, was never told she couldn't ask questions, and a human resources manager reviewed the agreements and advised her of the arbitration clauses, the court said.

"This evidence not only supports the court's determination that the … agreements were not adhesive, but shows the two agreements were not oppressive, Campos's argument to the contrary notwithstanding," the panel wrote. "The arbitration provisions were not imposed as conditions of her employment and Campos had ample opportunity to question and negotiate. Campos was not deprived of a choice, as she was never told there would be negative repercussions if she did not sign the agreements."

Inequity is inherent in preemployment arbitration contracts, the court noted, but the evaluation of unconscionability depends on context. "Considering the entire record, including Campos's own testimony credited by the trial court, the economic realities did not function to prevent Campos from discussing the agreements, questioning them, or negotiating them free of negative consequences," the court said. "Thus, the agreements were neither adhesive nor oppressive."

The panel rejected additional grounds for invalidating the agreements, finding that the failure to attach the American Arbitration Association rules was irrelevant because the agreement did not reference the rules, citing to a similar holding from the California Supreme Court (LINK).

Further, Campos was not surprised by the arbitration provision, the panel said. "There was no surprise here," the court wrote. In one agreement, the relevant paragraphs were located immediately above the signature line; in the second, a significant clause was highlighted in bold. A human resources representative "made affirmative efforts to bring the arbitration provision to the attention of Campos who had the opportunity to read before signing" and a Spanish interpreter was present to answer questions.

"As the agreements were not contracts of adhesion, were not oppressive, and did not contain surprise, they were not procedurally unconscionable," the panel concluded. "In light of our conclusion concerning procedural unconscionability, we need not address the second prong involving substantive unconscionability."

The approach taken by an administrative law judge (ALJ) of the NLRB presents a different take on arbitration in employment agreements.

Joanna Rosales was hired by IIG Wireless, a wireless and telecommunications products retailer, in August 2012. At the time, she signed an arbitration agreement presented to her as part of the application process. The agreement provided that "as a condition of employment," employees must agree to binding arbitration of "any dispute or controversy between [the Company and the employee] arising from or in any way related to … employment with the Company," with limited exceptions. The agreement did not specifically state whether disputes must be arbitrated individually or may be arbitrated on a class or collective basis.

When Rosales was terminated in January 2014, she filed a demand for arbitration on behalf of herself and a class of other employees, alleging wage and hour violations under California state law. IIG objected to the demand for class arbitration, arguing that because the agreement was silent on the issue, "it is resigned to individual arbitration."

Rosales responded with a class action complaint in California state court. A trial court judge denied Rosales' motion to compel arbitration, holding that because the agreement was silent on the availability of class arbitration, she was required to arbitrate only her individual claims. Rosales appealed and the case is currently pending before the state court of appeals.

Concurrently, her charge of unfair labor practices moved forward with the NLRB. The General Counsel took the position that the arbitration provision at issue was clearly unlawful under D.R. Horton and Murphy Oilbecause employees would reasonably construe it to require arbitration of unfair labor practice allegations, preventing them from filing such charges before the Board. In addition, IIG applied the provision to prevent Rosales from pursuing her wage and hour claims on a class basis, further violating the National Labor Relations Act (NLRA).

The employer responded that employees would not be confused about the arbitration agreement, which clearly applies to civil litigation and not administrative charges, adding that the D.R. Horton and Murphy Oil line of cases have been wrongly decided and rejected by the majority of courts to consider them, citing decisions from the Fifth Circuit Court of Appeals.

But ALJ Jeffrey D. Wedekind sided with the General Counsel and Rosales, noting that the language in the employer's agreement "is not significantly or substantially different from provisions found unlawful in other D.R. Horton/Murphy Oil cases," and referencing one federal court decision endorsing the Board's reasoning.

"In any event, administrative law judges must follow Board precedent unless and until it is overruled by the Supreme Court," the ALJ wrote. "Under that precedent, it is unlawful for an employer to maintain and/or enforce a mandatory arbitration provision that, either on its face or as applied, precludes employees from pursuing employment related claims on a class or collective basis in any forum."

IIG Wireless violated the NLRA by maintaining "a mutual arbitration agreement that employees would reasonably believe bars or restricts them from filing unfair labor practice charges with the [Board]," that as applied, "compels employees, as a condition of employment, to waive the right to maintain class or collective actions in all forums, whether arbitral or judicial," and attempting to enforce the agreement against Rosales in her state court action.

The ALJ ordered the employer to rescind or revise the agreement and notify Rosales and other employees of the changes. IIG must also inform the courts involved in the Rosales litigation that the company "no longer oppose[s] Rosales's class or representative claim on the basis that they are barred by the agreement." ALJ Wedekind further instructed the employer to reimburse Rosales for all reasonable expenses and legal fees.

To read the opinion in J.K. Residential Services, Inc. v. Superior Court, click here.

To read the decision in IIG Wireless, click here.