Alert - California Supreme Court Re-Vists Mandatory Arbitration Clauses in Employment Contracts

October 25, 2013
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In 2011, the California Supreme Court held that an employment contract requiring an employee to arbitrate all claims, which effectively acted to waive the employee's right to bring a claim to the Labor Commissioner alleging the employer's failure to pay wages (known as a "Berman" hearing), violated public policy and was therefore unlawful. Sonic-Calabasas A, Inc. v. Moreno (2011) 51 Cal.4th 659 (Sonic I). The Court also held that this rule was not preempted by the Federal Arbitration Act ("FAA") because it did not discriminate against arbitration agreements. However, in October 2011 the United States Supreme Court vacated the judgment and remanded the case for further consideration in light of AT&T Mobility LLC v. Concepcion, 563 U.S. ___, 131 S.Ct. 1740 (2011) (Concepcion). Concepcion held that, in light of both federal law providing that arbitration agreements are enforceable in the same manner as other contracts, and liberal federal policy favoring arbitration, the FAA preempts any state law which prohibits outright arbitration of a particular type of claim.

 

On October 17, 2013 the California Supreme Court issued its opinion after remand. The Court held that the FAA does in fact preempt California law prohibiting waiver of an employee's right to file a claim seeking a Berman hearing. However, the Court also held that employees may continue to challenge employment contracts on the grounds that the terms in the contract are "unconscionable." The difference is that a clause in an employment contract requiring the employee to arbitrate all disputes not covered by FEHA or the EEOC (i.e., claims alleging discrimination or harassment) does not, in and of itself, make the contract unenforceable or unconscionable. Instead, the courts will review arbitration terms and conditions for unreasonableness, including consideration of the relative bargaining strength of the contracting parties as well as the commercial setting, purpose, and effect of the contract.

 

This ruling is helpful to employers because it expands the right to include arbitration clauses in employment contracts. It is now clear that the law expressly allows employers to include such provisions. However, it is important to confer with experienced employment counsel in the drafting process. The opinion discusses several factors that courts will consider in determining whether an arbitration clause as applied is unconscionable. Provisions which are unduly harsh, or one-sided favoring the employer, are likely to be invalidated, although the Court declined to articulate a clear standard as to what constitutes "unconscionability."