Two California Court of Appeal decisions analyze recent developments in employment arbitration clauses regarding class actions and arbitration acknowledgments.
In Nelsen v. Legacy Partners Residential, Inc., the court interpreted an arbitration clause that only explicitly required arbitration of claims between the employee and employer to compel arbitration of plaintiff employee's individual claims, but refused to infer a requirement to arbitrate class claims.
The plaintiff in Nelsen filed a putative class action against Legacy (her former employer) for various wage and hour violations, such as failure to pay overtime and failure to provide meal and rest breaks. Legacy sought to compel arbitration of Nelsen's individual claims pursuant to an arbitration clause in a signed acknowledgement form at the end of its employee handbook. Although the clause covered claims between the employee and the company arising from her employment, there was no mention of arbitration (or waiver) of class claims. Citing the 2010 United States Supreme Court case of Stolt-Nielsen S.A. v. Animal Feed Int'l Corp., the court stated that absent a contractual basis showing that a party agreed to arbitrate class claims, the party may not be compelled to do so. The court further noted that omission regarding class arbitration cannot be interpreted as acceptance of such a term: specific indicia – separate from the existence of the agreement to arbitrate – are required. Since the clause clearly referred to the employee and the company (e.g., "either party's written request," "both Legacy Partners and I give up our rights to trial by jury," etc.), class arbitration was not required.
However, the court did grant Legacy's motion to compel Nelsen to arbitrate her individual claims because she failed to show that requiring her to do so violated state or federal law or public policy. In making its ruling, the court acknowledged the National Labor Relations Board D.R. Horton, Inc. decision (holding that requiring employees to waive class or collective wage and hour claims in an arbitral or a judicial forum as a condition of employment violated the National Labor Relations Act) as persuasive – not controlling – authority. How to treat class claims in arbitration is a difficult decision that employers should make with the advice of counsel, especially with the case law in a state of flux and the unknown influence of related decisions by government agencies such as the National Labor Relations Board. In another recent California Court of Appeal decision, Sparks v. Vista Del Mar Child and Family Services, the court declined to uphold an arbitration clause that was buried in the employee handbook. The court held that an unsigned acknowledgment of the handbook was insufficient to support the employer's motion to compel arbitration.
The employer in Sparks, Vista Del Mar, issued an employee handbook in 2006 with a dispute resolution policy requiring arbitration of claims relating to employment. The policy was on pages 35 and 36 of the handbook, along with a provision stating that the employer could revise or modify the handbook at any time, without notice. Other provisions stated that the handbook was a summary of the company's personnel policies, was designed to acquaint employees with information by highlighting these policies, and was not intended to create a contract of employment or alter the at-will employment relationship.
In 2007, employee Sparks signed a handbook acknowledgement form that stated the following: (1) the handbook contained the company's general personnel policies, (2) the employee understood that he was governed by its contents, and (3) the company could modify the policies in the handbook with or without notice. In 2009, the company issued a new handbook with a nearly identical arbitration clause except for a sentence requiring employees to sign a separate "full arbitration agreement" and a handbook acknowledgement form specifically acknowledging the arbitration policy in the handbook. Sparks claimed that he was unaware of the arbitration clause in the 2006 handbook and that he never signed the 2009 acknowledgement form or a separate arbitration agreement. The court denied the employer's motion to compel arbitration of Sparks's wrongful termination claim for the following reasons: (1) the arbitration clause was buried in a lengthy handbook; (2) the clause was not called to the attention of Sparks; (3) Sparks did not specifically acknowledge or agree to arbitration; (4) the handbook explicitly stated that it was not intended to create a contract; and (5) the handbook allowed the company to unilaterally modify the policies in the handbook. In addition, Sparks was not provided with a copy of the rules governing arbitration, the provision was not subject to negotiation, the provision required employees to give up certain administrative and judicial rights protected by statute, and it made no express guarantee regarding discovery rights.
The court noted that in order for an employee to effectively waive his or her right to a judicial forum, there must be "more than a boilerplate arbitration clause buried" in a handbook. The minimum requirement is that the employee sign (at the beginning of employment) a handbook acknowledgement form that expressly references the arbitration obligation. The court cautioned against employers trying to "have it both ways": stating that the handbook does not create a contract of employment, yet requiring employees to contractually agree to arbitration. The court noted that such an approach could "backfire" because it creates ambiguity that must be construed against the employer. If an employer is going to explicitly require, for example, that all employees sign a particular form, then the employer must ensure that this occurs. Uniform onboarding and handbook rollout processes, such as having every new employee sign all of the appropriate forms and acknowledgements, are important in ensuring enforceability of contractual obligations (including arbitration). Human Resources Departments should consider periodically auditing employee personnel files to ensure uniformity and compliance. These cases underscore the importance of reevaluating and scrutinizing arbitration provisions, whether in offer letters, employee handbooks, invention assignment agreements, or otherwise to ensure they are up to date, legally compliant, and accurately reflect the employer's actual practices.