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How California Businesses Can Avoid Potential Pitfalls in Arbitration Agreements

How California Businesses Can Avoid Potential Pitfalls In Arbitration Agreements

Arbitration often provides a less expensive and less time-consuming alternative to traditional litigation when it comes to resolving business disputes. Indeed, many employers prefer to use arbitration agreements when dealing with employment law-related matters, such as allegations of workplace discrimination or wrongful termination. But California businesses need to be careful when asking employees to sign arbitration agreements, as there are a number of legal pitfalls that could lead a court to declare such contracts unenforceable.

Can You Require Employees to Sign an Arbitration Agreement?

In 2020, the State of California adopted new legislation that forbids employers from making mandatory arbitration a condition of employment. This means that for new hires, you cannot ask a job applicant or new hire to sign any contract that includes a binding arbitration clause. (The legislation does not affect any existing arbitration agreement that was already in force.) You may still request such an agreement. But you cannot base your decision to hire–or not hire–someone based on their refusal.

The 5 Minimum Requirements

Arbitration agreements are contracts. As such, they require the same elements as any other business contract. For example, there must be consideration–such as the offer of employment–and neither side may procure the other’s agreement through fraud or duress. But the California Supreme Court has also held that an enforceable arbitration agreement must meet at least the following 5 minimum requirements:

  1. The arbitrators must be neutral parties.
  2. While the arbitration process need not follow the same pre-trial discovery rules as a civil lawsuit, it must still provide for “more than minimal discovery.”
  3. The arbitrator’s final award (decision) must be in writing.
  4. The arbitration process must provide for “all of the types of relief that would otherwise be available in court.”
  5. The employee cannot be required to pay “unreasonable costs” or pay the arbitrator’s fees as a condition for access to the arbitration process itself.

Procedural vs. Substantive Unconscionability

When an arbitration agreement is challenged in court, the judge will look at whether the terms of the contract are “unconscionable,” both in terms of procedure and substance. Procedural unconscionability addresses the circumstances of how the agreement was signed. For example, if you present a newly hired employee with a 20-page employment contract, but put the arbitration clause in smaller text on the final page, that could be considered a procedural abuse.

Substantive unconscionability goes to the fairness of the terms of the arbitration agreement. In some cases, if there is a significant degree of procedural unconscionability, that alone may be enough to prove substantive unconscionability. But in general, if an arbitration agreement’s terms are too one-sided in your favor, that will likely trigger the alarm of substantive unconscionability.

Some Basic Tips for Building a Better Arbitration Agreement

If you do wish to proceed with asking employees to sign an arbitration agreement, here are a few things to keep in mind:

  • Make sure the language of the agreement is presented in normal-sized type and try to avoid unnecessarily complicated language. The more difficult it is for the employee to understand what you are asking, the more likely a judge will scrutinize the agreement for unconscionability.
  • Give an employee sufficient time to read and understand an arbitration agreement before signing it. Do not discourage them from speaking with their own lawyer.
  • California courts tend to be more skeptical of arbitration agreements that bar employees from filing administrative complaints, such as discrimination charges with the state’s Department of Labor Standards Enforcement, so consider excluding such matters from the scope of an arbitration agreement.

Of course, before entering into any legal contract, you should also consult and work with an experienced Riverside business law attorney who can help ensure your actions remain within the bounds of the law. Contact Wagner Zemming Christensen, LLP, today to schedule a consultation.

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