Arbitration clauses in consumer contracts have become so common that many people don’t think twice when presented with an employment contract that includes a mandatory arbitration clause, or even a separate arbitration agreement. In 2018, the Economic Policy Institute (EPI) reported that more than 55% of U.S. workers–more than 60 million employees–were subject to mandatory arbitration. In California, the rate is even higher: more than 67% of California employees were subject to mandatory arbitration.
To many, this seems like a technical, procedural issue that doesn’t really matter. But, the impact of mandatory arbitration reaches far beyond whether a judge or arbitrator presides over your dispute. And, an arbitration agreement may be crafted to include a wide range of employment-related conflicts, including important issues such as:
If you’re considering a job and have been asked to sign an arbitration agreement, it’s important to understand exactly how that agreement may impact your rights.
An arbitration agreement is a contract, or a clause within a larger contract, which binds the parties to resolving disputes through arbitration rather than a civil lawsuit. The agreement will typically include terms detailing how the arbitrator will be selected, who is responsible for payment of arbitration fees, and other specifics.
Arbitration is often described as a mini-trial, or a less formal trial. A private arbitrator, rather than a judge or jury, hears and decides the case. Because the parties hire the arbitrator and don’t have to wait for open time on a crowded court docket, the case typically moves forward much more quickly than a trial. Courts and legislatures have historically favored arbitration because the process is usually more efficient and less expensive than resolving a dispute through the court system. Arbitration also shifts the burden of managing disputes and deciding issues away from the often-overburdened public courts.
But, there’s a reason arbitration is generally more efficient than a civil lawsuit: the arbitration process is limited when compared with a trial, and arbitration agreements often limit the types of damages available. Generally, both of these differences are bad for a consumer fighting a credit card company or an employee fighting a corporate employer.
One of the supposed benefits of arbitration is that it’s “streamlined.” At first glance, that may seem like a benefit. Courtroom proceedings are intimidating for many people, and of course it sounds good to have your case resolved more quickly. But, consider the reasons the arbitration process moves more quickly.
One key reason is that in the litigation process, each party has the opportunity to gather information and evidence from the other and from third parties. In arbitration, the arbitrator decides what evidence will be considered, even if that means excluding evidence that would be admissible in court. Parties can’t subpoena witnesses or demand production of documents. That’s almost always bad news for the consumer or employee, because he or she usually has less access to information than the company on the other side of the dispute. An arbitration agreement may even limit the time an individual has to initiate a claim, effectively reducing the statute of limitations.
Arbitration also means no jury. That’s often bad news for the “little guy.” When a large corporation has treated a consumer or employee badly, the last thing that company wants is a panel of regular people just like the plaintiff hearing about what they’ve done and making decisions about their liability.
Perhaps most importantly, the arbitrator’s decision is truly final. While a courtroom ruling or verdict can be appealed if it is inconsistent with applicable law or procedure, arbitration puts everything in the hands of a single individual–often, an individual whose livelihood depends on large businesses continuing to hire him.
Many arbitration clauses and separate arbitration agreements also include limitations on claims. For example, an arbitration clause might include language that says the compensation available is limited to actual damages, meaning that the plaintiff could not pursue a claim for punitive damages–even if the applicable state or federal law allowed for punitive damages.
One of the most common waivers included in arbitration agreements is known as a “class waiver.” A class waiver says, in essence, that the parties agree that any claims will be resolved individually, and may not be pursued as class claims. That’s a dangerous provision for employees and consumers alike, since class actions allow people with relatively small claims to pursue compensation that would otherwise be out of reach, due to the expense of bringing a claim.
Imagine, for example, that a large corporation with 10,000 employees under pays each of its workers by $5/week. Each employee would lose $260/year–enough to hurt at some pay rates, but a very small amount compared with the costs of fighting for fair compensation. Across all of those 10,000 employees, though, the company is wrongfully withholding $2.6 million each year. A class action allows workers in that situation to assert their rights and hold the company accountable, where that might be impractical for any individual worker.
A class waiver effectively eliminates that course of action. However, class action waivers are controversial and the law in this area is still evolving. So, if you have signed an arbitration agreement that includes a class waiver and believe you have a class action claim or have been invited to participate in a class claim, you should speak to an attorney before assuming that your claim is barred by the agreement.
California arbitration–including the enforceability of certain mandatory arbitration clauses and associated waivers–is governed by the Federal Arbitration Act (FAA) and the California Arbitration Act (CAA). The two statutes and the way courts interpret them are often in conflict. The FAA was enacted in 1925 with the specific purpose of ensuring that valid arbitration agreements were honored. In fact, the statute’s key language specifically provides that a written provision by which the parties agree to settle disputes under a contract involving commerce by arbitration shall be valid, irrevocable, and enforceable. The only exception is when there are legal or equitable grounds for revoking the contract.
The “involving commerce” qualification limits the application of the FAA to areas in which the federal government has jurisdiction. But, the U.S. Supreme Court long ago established that “involving commerce” should be interpreted broadly to include any issues that impact interstate commerce. This broad application has been an obstacle for California lawmakers seeking to expand protection for California consumers and employees.
The CAA language regarding enforcement of arbitration agreements is similar to that in the FAA. However, the CAA contains provisions allowing a court to reject a demand for arbitration under certain circumstances, even where an agreement mandates it. California courts have also more broadly interpreted the provision regarding grounds for revoking the contract.
However, California consumers and employees don’t often get the full protection of the California statute and the state courts’ interpretation of them. That’s because Article IV, paragraph 2 of the U.S. Constitution, commonly known as the “Supremacy Clause,” says that when state and federal law conflict, federal law wins.
In 2019, California passed a law that would prohibit employers from requiring applicants or existing employees to sign an arbitration agreement. Under the law, an employer would be barred from withdrawing a job offer, terminating an employee, or taking other retaliatory action because the employee opted not to agree to mandatory arbitration.
The new law does not impact arbitration agreements that have already been signed, nor the arbitration process. Lawmakers hoped that because the restrictions applied solely to the employer’s actions in advance of any agreement being executed, federal pre-emption under the FAA could be avoided. But, at the last minute–two days before the law would have taken effect– a federal court entered a temporary restraining order.
As of this writing, the temporary restraining order remains in effect and the court is taking supplemental filings on the motion for a preliminary injunction. It is unclear how long it will be before the issue is settled. For now, California employees and job applicants are without this important protection.
Generally, signing an arbitration agreement with an employer is not a good idea. In addition to waiving the opportunity for a jury trial and access to the appeals process, you may be losing out on the opportunity to gather and present evidence to support your claim, to subpoena witnesses, and even to pursue certain types of damages.
Unfortunately, unless and until AB 51 takes effect, a California employer can make signing an arbitration agreement a condition of employment. Some employers even include arbitration agreements in a larger packet of onboarding paperwork without mentioning it, so be sure to review everything you’re asked to sign carefully.
If you have high-end or hard-to-find skills, you may have leverage to negotiate the terms of your arbitration agreement. For example, you may want to bargain for a greater say in the choice of arbitrator, or to relax or eliminate limitations on the type of damages you can pursue through arbitration.
Of course, every situation is different. If a prospective employer asks you to sign an arbitration agreement and you’re in a position to negotiate, an experienced employment attorney can be your best resource. At Whitehead Employment Law, protecting the rights of California workers is all we do. To learn more about how we can help protect yours, talk to us for a free case review right now.
Fighting for employee rights is all that we do! And we work exclusively on contingency basis, which means we only get paid if we win the case, and you don’t have to pay anything out of your own pocket.
We have settled and tried cases winning millions of dollars in awards for clients whose employers have wrongfully terminated them, in addition to other ways California employers may have broken the law.
DISCLAIMER: This article does not provide legal advice and does not establish an attorney-client relationship. If you need legal advice, please contact an attorney directly.