Q. I am interested in having my employees sign an arbitration agreement for employment-related disputes. Is that legal and how do I ensure it is an enforceable agreement?
A. Yes, employers in California may require employees to agree to an arbitration agreement for their employment-related disputes as a condition of the employees’ employment.
For those who are unfamiliar with arbitration, arbitration is a private alternative to court that provides the parties with a legally binding alternative dispute resolution process. In arbitration, a chosen neutral third party, an arbitrator, takes the place of a judge by reviewing the evidence and facts to make a final decision for the parties. Employers may prefer arbitration because it is typically a faster, more efficient, and less formal alternative to court. Moreover, the employer can insert contract provisions that require employees to waive their rights to class action lawsuits against the employer. However, for an arbitration agreement to be enforceable, it must meet the following requirements:
Capable of contracting: An adult of sound mind is capable of entering a contract. Therefore, ensure that the employees you intend to have sign arbitration agreements are not minors and are competent adults.
Consent to arbitration: Employees must knowingly consent to arbitration. It is best practice to obtain a signed agreement from employees that they (1) consent to arbitration, or (2) acknowledge that their continued employment constitutes consent to arbitration.
Mutuality of agreement: The arbitration agreement must have a mutuality provision — this means both parties agree to arbitrate their employment related disputes against each other. This requirement prevents employers from signing an agreement that forces employees to arbitrate against the employer but reserves the employer’s own right to sue their employees in court.
Neutral arbitrator: For fairness reasons, the arbitration agreement must state that the arbitrator will be neutral. This prevents employers from unilaterally choosing an arbitrator that has a long-time business relationship with the employer. It also empowers employees to veto or propose an arbitrator the employee believes will be fair to both parties.
Adequate discovery: The agreement must also contain an adequate discovery provision. When litigating a dispute in court, the Code of Civil Procedure governs the rules of discovery. The arbitration agreement must allow the arbitrator to apply the same substantive discovery rules that a judge would apply in a court of law.
All relief available in court: The agreement must state that the parties are entitled to all the relief that would be available to the parties in a court of law. This means that any type of relief (e.g., injunctive) or damages (e.g., punitive) that a party could seek in a court, the party may also seek in the arbitration process.
Employer payment of excess fees: The informal and efficient nature of the arbitration process comes with an increased price tag. Therefore, courts require that the arbitration agreement state that the employer will pay the extra arbitration related costs that an employee would not have paid if the parties had litigated their disputes in court.
Written award: Finally, the agreement must also require the arbitrator to provide the parties with a written decision after the arbitration hearing. This written award, like a court order, will be enforceable and hold the parties accountable to the decision made by the arbitrator.
If an employer is interested in learning more about arbitration agreements or how to implement an enforceable arbitration agreement, they should contact their local labor and employment attorney.
Marco Lucido is a lawyer with Fenton & Keller in Monterey. This column is intended to answer questions of general interest and should not be construed as legal advice. Email queries to mlucido@fentonkeller.com
