Question:

I read recently that two new court cases talk about the enforceability of employment arbitration agreements. Could you please explain how those cases will affect employers who enter into arbitration agreements with their employees?

Answer:

In March 2009, the Court of Appeal of California decided two cases involving the enforceability of employment arbitration agreements. In both of those cases, Sanchez v. Western Pizza Enterprises and Franco v. Athens Disposal Company, the Court refused to enforce an employment arbitration agreement between an employee and his employer.

Arbitration is a form of alternative dispute resolution whereby the parties to a dispute agree in advance to submit their differences to an arbitrator or a panel of arbitrators instead of filing a lawsuit. Employers sometimes include arbitration provisions in employment contracts to avoid lawsuits and provide an alternative method for resolving disputes with employees. In arbitration, the decision of the arbitrator(s) may or may not be binding on the parties, depending on the agreement. Notably, as the following cases illustrate, employment arbitration agreements are not always enforceable, and in those instances, the courts resolve disputes between the parties.

In Sanchez v. Western Pizza Enterprises, the plaintiff, a pizza deliveryman, entered into an arbitration agreement with his employer. Despite the agreement, Mr. Sanchez filed a class action lawsuit in the Superior Court of Los Angeles County on behalf of himself and similarly situated delivery drivers. The lawsuit alleged violations of California minimum wage and overtime compensation laws. In response to the lawsuit, Western Pizza Enterprises attempted to force Mr. Sanchez to resolve his dispute through arbitration as provided in the arbitration agreement. The trial court refused to compel arbitration, reasoning that the arbitration agreement was unenforceable. Western Pizza Enterprises then appealed the decision to the California Court of Appeal.

The California Court of Appeal explained that two provisions in the arbitration agreement were unenforceable. First, the agreement contained a class action arbitration waiver that impermissibly interfered with the ability of employees to contest violations of their unwaivable statutory rights. The Court ruled that class arbitration would be a significantly more effective and practical means for the employees to pursue their claims for minimum wage and overtime compensation than individual litigation or arbitration would be.

Second, the agreement contained an arbitrator selection clause that was misleading in light of the fact that the “arbitration panel” only included one arbitrator. The employer had used the sole arbitrator in the past, which gave rise to an inference of financial bias. The Court explained that the two unenforceable provisions in the agreement rendered the entire arbitration agreement unenforceable, because the central purpose of the agreement was tainted with illegality. By refusing to sever the unenforceable terms from the rest of the agreement, the Court stated that it was deterring employers from inserting illegal clauses into employment arbitration agreements. As a result, Mr. Sanchez’s class action lawsuit went forward.

In Franco v. Athens Disposal Company, the plaintiff, a trash truck driver, entered into an arbitration agreement with his employer. However, contrary to the terms of the agreement, he filed a class action lawsuit against his employer in the Superior Court of Los Angeles County, alleging violations of meal and rest period laws. Athens Diesel Company petitioned the court to force arbitration, and the trial court granted its petition and ordered the case to arbitration. Mr. Franco appealed the decision to the California Court of Appeal.

The California Court of Appeal reversed the trial court’s decision, reasoning that two provisions in the arbitration agreement were unenforceable. First, like in Sanchez, there was a class arbitration waiver that impermissibly interfered with the employees’ ability to pursue their unwaivable statutory rights. Second, there was a provision that prevented the truck driver from acting as a private attorney general on behalf of similarly situated employees. The court held that this provision was unenforceable as it nullified the California Labor Code Private Attorney Generals Act of 2004. Because those two provisions tainted the arbitration agreement with illegality, the Court of Appeal held that the agreement as a whole was unenforceable.

These two new cases confirm that employment arbitration agreements should be carefully drafted to avoid including unenforceable terms. Further, if an employment arbitration agreement contains multiple unenforceable terms, and the court decides that the agreement is permeated by an unlawful purpose, the court has the power to refuse to enforce the entire agreement. For advice regarding employment arbitration agreements, contact your employment law attorney.
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