Arbitration Clauses in Employment Agreements

Have you been fired from your job? Do you believe that your termination was wrongful? Would you like to file a wrongful termination complaint against your former employer? Does your employment agreement contain an arbitration clause? What is arbitration? Does an arbitration clause preclude you from filing your claim in court?

Arbitration is the most traditional form of private dispute resolution in which a neutral third party (ie. the arbitrator – who is usually a retired judge or attorney) renders a decision after a hearing at which both parties have an opportunity to be heard. Arbitration is designed to avoid the formalities, delays, expenses, and vexation of ordinary litigation (Black’s Law Dictionary, 6th Ed.).

Many individuals who have endured an injustice at the workplace seek remedy through the courts. However, many employment agreements contain an arbitration clause. Arbitration clauses, in general, stipulate that if there is any dispute or disagreement related to the employment (eg. claims of discrimination, wrongful termination, claims of harassment, etc.) both the employer and employee agree to submit the dispute to binding arbitration pursuant to the California Arbitration Act (California Code of Civil Procedure §1280, et. seq.). The decision reached at the end of an arbitration hearing is final and binding

But the simple inclusion of an arbitration clause does not necessarily preclude access to the courts. If a court finds that the employment agreement is an “unconscionable contract,” the court can refuse to enforce the arbitration clause (California Civil Code §1670.5(a)).

So what constitutes an unconscionable contract? In brief, a contract is unconscionable if it is an “adhesion contract,” which is to say that there is no equal bargaining power, no real negotiation, and an absence of meaningful choice (Ellis v. McKinnon Broad, Co. (1993); American Software, Inc. v. Ali (1996); Circuit City Stores v. Adams (2001)). Under California law, unconscionability consists of two components: (1) procedural; and (2) substantive.

Firstly, the procedural element focuses on two factors: oppression and surprise. Secondly, the substantive element focuses on “overly harsh” or “one-sided” terms within the contract (A&M Produce Co. v. FMC Corp (1982)). Arbitration clauses must meet certain requirements to be lawful, including “provid[ing] for more than minimal discovery,” and “not requir[ing]] employees to pay either unreasonable costs or any arbitrator’s fees or expenses as a condition of access to the arbitration forum” (Armendariz v. Found Health Psychcare Servs. (2000)).

Both procedural and substantive unconscionability must be present before a court will refuse to enforce a contract and its arbitration clause. If you believe that both are present in your case, or simply would like legal analysis, we recommend that you consult an attorney, who should b able to advise you of your choices.

[Many thanks to our friends at the Judicial Arbitration and Mediation Services (JAMS) for source materials on this topic.]

[Case References: Ellis v. McKinnon Broad, Co. (1993) 18 Cal.App.4^th 1796, 1803; American Software, Inc. v. Ali (1996) 46 Cal.App.4^th 1386, 1390; Circuit City Stores v. Adams (2001) 532 U.S. 105, 119; A&M Produce Co. v. FMC Corp (1982) 135 Cal.App.3d 473, 486-87; Armendariz v. Found Health Psychcare Servs. (2000) 24 Cal.4^th 83, 114]

[CA Statute References: California Code of Civil Procedure §1280; California Civil Code §1670.5(a)]