While many employers favor mandatory employment arbitration for the resolution of employment-related disputes, they must be careful to ensure that their arbitration agreements meet strict legal requirements. Two recent California cases demonstrate that courts continue to heavily scrutinize such agreements to ensure that employees' rights are being adequately protected.
In Sonic-Calabasas A, Inc. v. Moreno, the California Supreme Court held that an arbitration agreement which precludes an employee's ability to file a wage claim with the Division of Labor Standards Enforcement ("DLSE") and proceed to a "Berman" administrative hearing is unconscionable and therefore unenforceable. In Sonic, the employer attempted to compel arbitration of a former employee's DLSE claim for unpaid vacation, pursuant to an arbitration agreement which required the arbitration of "all disputes" except for claims brought under the National Labor Relations Act, the California Workers' Compensation Act or claims before the Employment Development Department. After the trial court denied the employer's petition to compel arbitration and the appellate court reversed the trial court, the California Supreme Court reviewed the case. Noting that the Berman hearing process gave an employee certain advantages designed to reduce costs and risks of pursuing a wage claim, the court determined that an employee's statutory right to seek a Berman hearing is an "unwaivable right that an employee cannot be compelled to relinquish as a condition of employment." Accordingly, the court held that waiver of a Berman hearing is both against public policy and unconscionable, and a petition to compel arbitration during the pendency of a Berman hearing was premature and must be denied. However, the court did hold that arbitration provisions are enforceable after a Berman hearing has taken place.
In another case, Macias v. Excel Building Services LLC, a California federal district court refused to enforce a mandatory employment arbitration agreement on grounds that the agreement contained unconscionable terms that could not be severed from the agreement. Key to the court's ruling was a finding that the agreement's exception to arbitration for claims of unfair competition, trade secrets or confidentiality unfairly benefited the employer. The court stated that it was "implausible" that an employer would bring a lawsuit against an employee outside the scope of unfair competition, trade secrets and confidentiality, and therefore the agreement lacked mutuality. In other words, the court felt that the agreement compelled the employee, but not the employer, to submit claims to arbitration. The court held that the employer's concerns regarding protection of its trade secret information was an insufficient justification for the one-sided agreement. The court was also critical of other provisions in the agreement which: (1) apparently allowed the employer to amend terms of the agreement without giving notice to the employee; and (2) provided no details about the arbitration process but implied that a formal alternative dispute resolution and grievance process existed. Ultimately, the court determined that severing the multiple unconscionable terms was "not a viable solution" and therefore refused to enforce the agreement.
In light of these decisions, employers should review their existing arbitration agreements with counsel.