The California Supreme Court has given an important stamp of approval to the use of mandatory arbitration clauses as a condition of employment as long as they meet certain requirements assuring fairness to employees. In the wake of the ruling, you’ll need to immediately review, and possibly revise, arbitration agreements signed by existing employees and new hires to be sure they will stand up in court.
Same-Sex Harassment Case
In a suit filed against their former employer, Foundation Health Psychcare Services Inc., in San Rafael, Marybeth Armendariz and Dolores Olague-Rodgers claimed their female boss sexually harassed them and they were illegally fired because they are heterosexual.
Foundation Health argued that the lawsuit should be dismissed, and the claims should be decided by an arbitrator under the terms of a binding arbitration agreement Armendariz and Olague-Rodgers signed when they were hired.
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Agreement One-Sided, Defective Beyond Repair
The California Supreme Court, however, refused to enforce the agreement, finding it deficient in several respects.
First, the employees were required to arbitrate all of their grievances against Foundation Health, but the employer was allowed to sue the workers for any claims it had against them.
Second, the agreement unlawfully restricted the damages the employees could recover to back pay only, and barred them from getting punitive damages which they could have sought in court.
Third, the agreement required employees to pay a share of the arbitrator’s fees, an expense they wouldn’t have incurred in a lawsuit.
Elements Of A Lawful Arbitration Agreement
Although the court threw out the arbitration agreement in this case because it had too many problems, the court said there is nothing wrong with requiring employment disputes to be resolved by an arbitrator if certain conditions are met. Here’s a checklist of what your agreement will need to pass muster:
- Don’t limit remedies. Employees must not be prevented from seeking remedies such as punitive damages and attorneys’ fees that they could recover in court.
- Make the agreement mutual. If employees have to arbitrate certain types of claims, employers must also be required to arbitrate similar issues. One complication on this point is that employers sometimes face a situation where it’s necessary to file a lawsuit to obtain an injunction against employees who are, for example, disclosing trade secrets. To preserve this right, the arbitration agreement should state that either party can go to court to seek an injunction. However, the question of how such a provision would affect the enforceability of the arbitration agreement hasn’t been decided by the courts.
- Designate a neutral arbitrator. The arbitrator should be independent and impartial.
- Allow for adequate discovery. Employees must have access to essential employer documents and witnesses necessary to present their claims before the arbitrator.
- Require a written decision. The arbitrator must be required to issue a written decision describing the basis of their findings so a court can review them if necessary.
- Specify that the employer will pay costs. An arbitration agreement can’t compel employees to pay any type of expense they wouldn’t incur in court. They can be required to pay a filing fee with an arbitration organization, but they can’t be forced to shoulder the arbitrator’s fee or other costs unique to arbitration.
Arbitration Agreements Still Controversial
This decision of the California Supreme Court conflicts with a ruling of the federal Ninth Circuit Court of Appeals invalidating employment contracts that require workers to arbitrate discrimination claims under federal law. However, the U.S. Supreme Court is currently reviewing a case involving arbitration under federal law. We’ll keep you posted.