818.501.4343November 20, 2024
Arbitration agreements are a staple of many employment relationships in California. These contracts require the employer and an aggrieved employee to submit their dispute to a third-party arbitrator, who receives evidence in a quasi-judicial proceeding and renders a decision that can be binding on the parties.
These agreements can benefit employers and employees alike, allowing both parties to bypass the costs and time associated with traditional litigation. In many instances, a party who disagrees with the arbitrator’s decision has the right to appeal that decision to the appellate courts.
Business leaders and their employer defense attorneys will need to reexamine their use of arbitration agreements in light of changes brought by California Senate Bill (SB) 365. This law, which took effect on January 1, 2024, gives trial courts new powers that can work against employers looking to use arbitration to avoid litigation.
Arbitration Before January 1, 2024
Before SB 365, California’s Code of Civil Procedure laid out a straightforward process for employees to follow when bringing a claim against their employers. If the parties had an arbitration agreement but the employee didn’t want to arbitrate the claim, the employer could file a motion to compel arbitration.
If the court denied the employer’s motion to compel, the employer could appeal to the appellate courts. In doing so, the trial court would pause any pending litigation until the appellate court weighed in on the matter. This could be months or years after the trial court initially denied the motion.
With this dynamic, employees and their rights can suffer. Employers and their employer defense teams can often afford to prosecute such appeals, whereas employees might not have the resources to litigate an appeal. Moreover, the appeals process can take a considerable amount of time, further straining employees’ resources.
How SB 365 Changes Arbitration
Following the passage of SB 365, trial courts now have the discretion to permit litigation to continue after a motion to compel arbitration is denied. As a result, an employer could find themselves having to navigate an appeal while simultaneously defending against litigation in the trial court.
This change in law is a victory for employees whose cases can proceed toward a resolution faster than before. However, some employers and employer defense attorneys argue that SB 365 undercuts the purpose of arbitration agreements, which are meant to help the parties avoid the costs associated with traditional court proceedings.
How California Employers Can Respond to SB 365
Regardless of how employers might feel about SB 365, it’s in their interests to review their current policies and practices in light of the new law.
In particular, business leaders and their employer defense teams should review existing arbitration agreements for enforceability. When doing so, they must keep the following key points in mind:
Avoid Unfair Provisions
First, any arbitration agreement should contain reasonable and fair terms for both parties.
A court can invalidate a contract that gives the employer unfair advantages, such as choosing the arbitrator and having rights the employee doesn’t have. A court may use its new power under SB 365 to refuse to compel arbitration and permit the employee’s claim against the employer to proceed.
Don’t Make Employees Sign Under Duress
An employee signs an arbitration agreement under duress when circumstances override their free will. Employers shouldn’t threaten their employees or prospective employees to induce them to sign an arbitration agreement. This could include threatening or lying to the employee about the consequences of not signing the contract.
Give Employees Enough Time to Review the Agreement
Similarly, you should give employees or prospective employees a reasonable amount of time to review an arbitration agreement before signing. They should also be allowed to consult an attorney of their choosing.
While there’s no definitive length of time you should wait, the period shouldn’t be so brief that no reasonable person would have time to meet with a lawyer.
Make Sure Employees Have Legal Capacity Before Signing, and the Agreement is in a Language They Understand
An employee who is under the age of 18 or who suffers from a mental infirmity may lack the legal capacity to sign an agreement.
A person who doesn’t have legal capacity can’t enter into any binding contract, including an arbitration agreement. Therefore, employers should take time to ensure that their employees are of lawful age and don’t exhibit any signs indicating an inability to understand the arbitration agreement.
Further, it is a good practice to have arbitration agreements translated if there is concern the employee may later argue the agreement they signed was written in a language they are not fluent in.
Though contracts can still be enforceable if the employee signed it even if they did not understand what they were signing, a translated version is a better practice to avoid such challenges down the road.
No Arbitrating Certain Claims
Employers in California can’t arbitrate workers’ compensation or unemployment benefits claims, nor can they require employees to arbitrate workplace sexual harassment or assault claims. Courts won’t require employees to arbitrate these matters, even if an otherwise valid arbitration agreement exists.
Avoid Frivolous Appeals
Before SB 365, most employers would automatically appeal the denial of a motion to compel because doing so was in their interest. The act of appealing under these circumstances would automatically pause any further trial court proceedings — the employer would then have time before having to litigate the employee’s claim.
In light of SB 365, employers may want to be more judicious about appealing the denial of a motion to compel arbitration.
Because trial courts can now order litigation to proceed even if an appeal is filed, employers may wish to conserve and focus their resources. It may not make sense to pursue a groundless appeal of a denied motion to compel arbitration.
Employment Arbitration Continues to Evolve in California
Numerous attempts have been made to refine employment-related arbitration in California, and SB 365 is simply the latest effort. With its passage, employers lose a tool they once had to slow down the resolution of employment-related disputes. Now, the trial court has much greater control and discretion over the pace of specific employment claims.
Employers and their employer defense teams’ primary recourse in this situation is to reexamine their arbitration agreements for enforceability. California employers can continue to benefit from their arbitration agreements by avoiding unnecessary denials of motions to compel arbitration.
If a motion to compel is denied, employer defense lawyers can work with their clients to determine whether appealing the denial is a wise tactical decision.
Pearlman, Brown & Wax, LLP defends employers and can help you with your policies and complex arbitration matters under this new law. Contact us today to make sure your agreements are up to date and protect your business.