Arbitration Agreements  

By Roger M. Mason, Esq., Rachael E. Brown, Esq., Caitlin E. Kaufman, Esq.

Arbitration agreements are the single most effective way for California employers to mitigate class action litigation.  While an enforceable arbitration agreement may bar an employee from maintaining a class action, it cannot prevent employees from filing representative actions under the Private Attorneys General Act (“PAGA”) or from recovering penalties under PAGA.  An arbitration agreement can, however, require employees to arbitrate their individual PAGA claims, halting the litigation and, if the employer successfully defends those claims in arbitration, the employee will no longer be permitted to pursue the PAGA representative action in court.  For these reasons, arbitration agreements can potentially save employers hundreds of thousands of dollars in litigation costs.

Here are 10 tips designed to ensure that arbitration agreements are enforceable:

1. Arbitration agreements can be mandatory (at least for now), so long as they are not procedurally or substantively unconscionable.
2. Employees must be given sufficient time to review and consider the agreement.
3. If an employee does not speak English, the employer should provide a translated version of the agreement.
4. Arbitration agreements must be a stand-alone document, and the language must be clear and may not be confusing.
5. Both the employer and employee must sign the agreement for it to be valid and the terms must be reciprocal, i.e., they may not be one-sided.
6. The arbitration agreement should specifically prohibit class and representative actions.
7. Arbitration agreements must not contain a third-party beneficiary clause.
8. The agreement must hold the employer responsible for paying all costs of the arbitration, except for the employee’s attorneys’ fees.
9. The agreement must extend only to claims that arise out of the employment relationship and the termination thereof.
10. Certain claims are not subject to arbitration, including: sexual assault or harassment; administrative charges filed with a federal, state, or local government office or agency, such as the Equal Employment Opportunity Commission (“EEOC”) or the National Labor Relations Board (“NLRB”); claims for workers’ compensation benefits, state disability benefits, state unemployment benefits; the Company’s profit sharing and 401(k) Plan, or a judicial action by either party for a temporary restraining order or a preliminary injunction pending arbitration.  The agreement should contain a carve-out for these claims. 

What Employers Should Do Now: Contact counsel to draft arbitration agreements for all your employees.  If you already have agreements in place, have them immediately reviewed to ensure compliance with the requirements highlighted above.

For more information about any of these employment legal updates, including information about conducting an HR Compliance Audit and/or Management Training, please contact our employment team at 408-356-3000 or via email: Roger Mason at rmason@smllp.com, Rachael Brown at reb@smllp.com, or Caitlin Kaufman at ckaufman@smllp.com.