California – Agreements to Arbitrate Employment Disputes
You were just terminated…
If the unfortunate day comes when you have a dispute with your employer or you were wrongfully fired, you might think that you will have your day in court. You will first need to think back to the point when you were hired and whether you signed an agreement in which you waive your right to have your dispute heard by a jury. You may have even waived your right to have your dispute heard by a court of law. You may have already agreed that your dispute must be heard by one or more arbitrators whom you will have to pay to decide your dispute, even if they decide against you. This will briefly outline a few of the issues which arise in deciding whether an arbitration agreement is valid.
- The law of contract determines whether you entered a binding agreement to arbitrate.
- A contract requires mutual consent to the terms
- Is acknowledgement of receipt of the employee handbook enough?
- What if the employer states the handbook is “subject to change” at “any time” – Does that make the arbitration clause illusory?
- What if the employer never signs the arbitration agreement … is it still effective?
“An essential element of any contract is the consent of the parties, or mutual assent.” (Donovan v. RRL Corp. (2001) 26 Cal.4th 261, 270.)
The consent of the parties to a contract must be communicated by each party to the other. (Civil Code, § 1565(3).)
“Mutual assent is determined under an objective standard applied to the outward manifestations or expressions of the parties, i.e., the reasonable meaning of their words and acts, and not their unexpressed intentions or understandings.” (Alexander v. Codemasters Group Limited (2002) 104 Cal.App.4th 129, 141, disapproved on other grounds in Reid v. Google, Inc. (2010) 50 Cal.4th 512, 524.)
The court explained: “To support a conclusion that an employee has relinquished his or her right to assert an employment-related claim in court, there must be more than a boilerplate arbitration clause buried in a lengthy employee handbook given to new employees.” (Id. at p. 1522.)
“The right to arbitration depends on a contract. Accordingly, a party can be compelled to submit a dispute to arbitration only where he has agreed in writing to do so.” (Boys Club of San Fernando Valley, Inc. v. Fidelity & Deposit Co. (1992) 6 Cal.App.4th 1266, 1271, fn. omitted.)
The party seeking arbitration must prove the existence of an arbitration agreement by a preponderance of the evidence, and the party opposing arbitration bears the burden of proving by a preponderance of the evidence any defense. (Peng v. First Republic Bank (2013) 219 Cal.App.4th 1462, 1468.
In Mitri v. Arnel Management Co. (2007) 157 Cal.App.4th 1164, the plaintiffs received and signed a general employee handbook which discussed the employer’s arbitration policy. (Id. at p. 1168.) The court found this was insufficient to show mutual assent to arbitrate because the arbitration agreement provision contained in the handbook also placed the plaintiffs on notice that they would be required to sign and enter into a separate arbitration agreement with the defendant. (Id. at p. 1167.) However, no separate arbitration agreement was ever generated. (Id. at p. 1168.) As there was no signature from any of the employees specifically agreeing to arbitrate, the court concluded that there was no arbitration agreement. (Id. at pp. 1172‑1173.)
In Sparks, supra, 207 Cal.App.4th 1511, the agreement to arbitrate was found in an employee handbook which contained a provision stating the employer could modify it at any time without notice, as well as a provision stating that the handbook was “ ‘not intended to create a contract of employment . . . .’ ” (Id. at 1516.) In addition, the arbitration provision was buried in the handbook, and was not prominently distinguished from the other provisions or otherwise highlighted. (Id. at 1519.) The Sparks court concluded that no contract to arbitrate existed, focusing primarily on the language that the handbook was not intended to create a contract of employment—which suggested that the handbook was “informational rather than contractual”—and on the fact that the acknowledgment signed by the employee “failed to point out or call attention to the arbitration requirement . . . .” (207 Cal.App.4th at p. 1520.)
In Romo v. Y–3 Holdings, Inc. (2001) 87 Cal.App.4th 1153, the court held that no agreement to arbitrate resulted from the plaintiff’s signature at the end of the employee’s handbook, which contained an arbitration provision. The court found that the handbook contained two separate and severable agreements: (1) the agreement to arbitrate which was the subject of one section; and (2) an agreement to be bound by the “benefits,” “policies,” “rules” and “procedures” contained within the remaining sections of the employee handbook. (Id. at 1159.) The plaintiff did not sign the arbitration section, but did sign an acknowledgment at the end of the other sections. (Ibid.) The court concluded that, because the employee had not signed the separate section about arbitration, the employee therefore did not agree to binding arbitration. (Id. at 1159‑1160.)
But different facts can lead to a different result. If the mandatory arbitration policy is not buried in a lengthy employee handbook, the result could change. If the arbitration policy was set out in its own two-page, easy-to-read document, separate from any other document that an employee is required to execute as part of her employment, the court can reach a different conclusion. For instance, the arbitration is clearly labeled as such, e.g., at the top of a document and clearly labeled “MANDATORY ARBITRATION POLICY” in capitalized lettering, unmistakably informing the employee of the document’s purpose.
In Bianco v. H.F. Ahmanson & Co. (C.D.Cal. 1995) 897 F.Supp. 433, 440, the Court held that “An employee handbook which states on its face that it ‘is not intended to constitute or create, nor is it to be construed to constitute or create, the terms of an employment contract’ cannot be a promise or a commitment to future behavior.”
In 24 Hour Fitness, Inc. v. Superior Court (1998) 66 Cal.App.4th 1199, the employee argued that the arbitration clause was “illusory” and “fatally lacking in mutuality” because it permitted the employer to modify unilaterally any provision in its personnel handbook, including the arbitration provision, at any time. (Id. at 1213.)
The court rejected that argument, noting that the employer’s discretionary power to modify the terms of the employment agreement “indisputably carries with it the duty to exercise that right fairly and in good faith. [Citation.]” (Id. at 1214.) So construed, the court held, “the modification provision does not render the contract illusory.” (Ibid.)
Courts have followed 24 Hour Fitness and concluded a binding arbitration agreement exists even though the employer retains the right to modify its personnel policies. (See, e.g., Peng, supra, 219 Cal.App.4th at pp. 1473‑1474 [following 24 Hour Fitness and rejecting argument that provision for unilateral modification rendered the arbitration agreement illusory and lacking in mutuality].
Similarly, in Serpa v. California Surety Investigations, Inc. (2013) 215 Cal.App.4th 695, 707‑708, the Court held that “the implied covenant of good faith and fair dealing is properly applied in this case and saves this arbitration contract from being illusory.”
See also Peleg, supra, 204 Cal.App.4th at p. 1465, where the Court held that the employer’s ability to make unilateral modifications did not render arbitration agreement illusory because implied covenant of good faith and fair dealing would preclude any change that undermined employee’s rights.
You can imagine a situation where an employer hands out a personnel handbook and asks the employees to sign it. The employee dutifully signs it but the employer never does. Given that an agreement to arbitrate requires an “agreement,” and the employer has never signed the document, how can there be an agreement?
The courts have even held that the writing memorializing an arbitration agreement need not be signed by both parties in order to be upheld as a binding arbitration agreement. In Banner Entertainment, Inc. v. Superior Court (1998) 62 Cal.App.4th 348, the court explained, “it is not the presence or absence of a signature [on an agreement] which is dispositive; it is the presence or absence of evidence of an agreement to arbitrate which matters.” (Id. at 361.)
Evidence of a binding agreement to arbitrate even if unsigned, can be based, for example, on “conduct from which one could imply either ratification or implied acceptance of such a provision.” (Craig v. Brown & Root, Inc. (2000) 84 Cal.App.4th 416, 420‑423 [despite absence of a signed writing acknowledging receipt of the memorandum and brochure containing the arbitration provision, the employee’s continued employment constituted implied acceptance of the agreement].)
This is just a sample of the issues that arise with arbitration agreements in the employment law context. There are other defenses that the employee can assert to keep the dispute in a court or in front of a jury.