Over the past few years,
employers have gotten a legal earful regarding the various provisions and
employee protections that must be included in a mandatory arbitration agreement
for it to hold up in court. A new decision, however, points out that these strict
rules don’t always apply.
Agreement to Arbitrate
James Giuliano moved
from
president and chief financial officer for Inland Empire Personnel, Inc., and six
related entities (all referred to as Empire). In an employment agreement he
signed, Giuliano agreed to arbitrate any and all disputes (except workers’
compensation and unemployment claim issues). Similar arbitration language was
included in Empire’s employee handbook and in an employee bonus plan document Giuliano
signed.
2
Employee Sues for
Millions
Giuliano left Empire two
years later and then sued, claiming the company owed him a $5 million to $8
million profit-sharing bonus under the bonus agreement and a $500,000 severance
payment under the employment agreement’s terms. His lawsuit charged that the nonpayment
violated Labor Code provisions relating to nonpayment of wages and amounted to
a breach of contract. What’s more, Giuliano’s suit alleged that the employment
arbitration provisions were unenforceable under Labor Code Section 229, which
states that court actions to collect unpaid wages may be brought despite the
existence of a private agreement to arbitrate.
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Employer Seeks
Arbitration
Empire, on the other
hand, asked the court to enforce the arbitration agreement and dismiss the
court action. The trial court denied Empire’s request, ruling that the
arbitration clause was unfair and therefore invalid because it didn’t meet the
standards for mandatory arbitration agreements the California Supreme Court
laid out in a 2000 case called Armendariz v. Foundation Health Psychcare
Services, Inc.
Court Enforces
Arbitration Provision
But now a California
Court of Appeals has ruled that Giuliano must arbitrate his claims.1 The court explained that
the strict requirements for arbitration agreements spelled out in Armendariz
apply only to claims that arise under the California Fair Employment and
Housing Act (FEHA) or that are tied to a fundamental public policy (such as
statutory claims for unpaid overtime).
The motivation for the
state Supreme Court’s ruling in Armendariz was to ensure that
employer-mandated arbitration agreements didn’t become vehicles for the waiver
of FEHA rights—thus, the high court held that such agreements are enforceable
only if they provide for neutral arbitrators, more than minimal discovery, a written
award, and all types of relief the employee could otherwise recover in court.
Further, such agreements may not require employees to pay arbitrator fees or
any other kinds of costs that could be considered unreasonable. In another
decision, the state Supreme Court ruled that these same requirements apply to mandatory
arbitration of claims alleging a violation of fundamental public policy that is
set out in a constitutional provision or a statute.
While
claims for statutory overtime or minimum wage do involve public policy, Giuliano’s
claims simply involved a breach of contract for a multimillion dollar bonus and
severance payments
The appeals court ruled
that the Armendariz requirements don’t apply to breach of contract
claims—like Giuliano’s—that don’t involve alleged public policy violations. The
court rejected Giuliano’s contention that his claim for the unpaid severance
and bonus implicated
public policy regarding the right to be paid unpaid wages. While claims for
statutory overtime or minimum wage do involve public policy, Giuliano’s claims
simply involved a breach of contract for a multimillion dollar bonus and
severance payments. Thus, arbitration could be compelled here regardless of
whether the arbitration provision lived up to the Armendariz standards.
What’s more, ruled the court, the arbitration agreement here wasn’t otherwise
unfair.
Practical Impact
Because of this case,
contract claims for unpaid severance or bonuses may be subject to arbitration
even if the agreement to arbitrate doesn’t meet the strict Armendariz requirements.
Employers may want to consider tailoring arbitration agreements to restrict the
types of remedies and damages available for such claims, as well as other
claims—such as fraud—that aren’t tied to a constitutional or statutory public
policy. Because drafting can be tricky, however, it’s wise to consult your
employment counsel for guidance.
_
1 Giuliano v. Inland Empire
Personnel, Inc.,
Court of Appeals (Dist. 4) No. B190771, 2007