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Arbitration Agreement in Employment Application Unconscionable, Unenforceable, California Court Rules

  • January 20, 2012

A provision in an employment application requiring the applicant, but not the employer, to submit all disputes to arbitration was both procedurally and substantively unconscionable, and therefore unenforceable, the California Court of Appeal, Third Appellate District, has ruled.  Wisdom v. AccentCare, Inc., No. C065744 (Cal. Ct. App. Jan. 3, 2012).  The agreement was procedurally unconscionable, the Court said, because the trial court found the plaintiff-applicants had no opportunity to negotiate its terms, the applicable arbitration rules were not provided, and the employer did not explain the agreement’s meaning.  The agreement also was substantively unconscionable because, unlike the applicant, the employer was not bound to submit claims to arbitration.  Consequently, the appellate court affirmed the order denying arbitration.

Factual Background

Batseba Escoto, Jessica Bondi, Norma and Katrina Rodriguez and others were on-call staffing coordinators for AccentCare, Inc.  Their duties included ensuring that all cases are staffed during off-hours to respond to any call within 20 minutes. 

When the workers applied for employment, they each signed a multi-page application that had an arbitration agreement on the last page.  The agreement provided, in relevant part:  “I hereby agree to submit to binding arbitration all disputes and claims arising out of . . . this application [and] . . . which might arise out of my employment with AccentCare, whether during or after that employment.”  The agreement also provided that arbitration would be conducted under the Rules of the American Arbitration Association (“AAA”).
 
The application was part of an employment packet consisting of multiple documents.  The employees had no opportunity to negotiate the arbitration agreement’s terms.  AccentCare did not inform the employees that their signatures were optional, did not explain the meaning of the arbitration agreement, and did not provide a copy of the referenced AAA Rules.

The employees sued the employer for unpaid wages and overtime for time spent handling off-hour calls.  The employer asked the trial court to compel arbitration based on the agreement.  The trial court denied the request, finding the pre-hire arbitration agreement procedurally and substantively unconscionable.

Applicable Law

Under California law, an arbitration agreement would be invalid if it is both procedurally and substantively unconscionable.  A sliding scale is used to assess procedural unconscionability in proportion to substantive unconscionability: the more substantively oppressive the contract provision, the less procedural unconscionability is required to conclude that the provision is unenforceable, and vice versa.  Armendariz v. Foundation Health, 24 Cal. 4th 83, 114 (Cal. 2000). 

When reviewing an arbitration agreement for procedural unconscionability, a court examines two factors — oppression and surprise.  “Oppression arises from an inequality of bargaining power that results in no real negotiation and an absence of meaningful choice,” and “[s]urprise involves the extent to which the supposedly agreed-upon terms are hidden in a prolix printed form drafted by the party seeking to enforce them.”  Stirlen v. Supercuts, Inc., 51 Cal. App. 4th 1519, 1532 (Cal. Ct. App. 1997).  In California, there is “little dispute” that an arbitration agreement “imposed on employees as a condition of employment” without the opportunity for negotiation is adhesive.

Substantive unconscionability refers to overly harsh or unjustifiable one-sided results.  A lack of mutuality renders an arbitration agreement imposed by an employer on an employee substantively unconscionable.

Agreement Unenforceable

The Court of Appeal found “abundant evidence” that the arbitration agreement was both procedurally and substantively unconscionable. 

As to procedural unconscionability, the Court found the agreement “inherent[ly]” unconscionable due to the unequal bargaining power of the parties because the agreement was provided upon the employees’ application for employment.  The Court noted that there was no evidence the employees were “highly sought after skilled employees who individually negotiated the details of their employment relationship with AccentCare.”  The employer also failed to provide a copy of the applicable arbitration rules.  The element of surprise also was present because the agreement was in an employment application provided with several other employment documents, and the employer did not explain that, by signing the agreement, the employees were waiving their right to a trial.

Addressing substantive unconscionability, the Court found the agreement lacked mutuality because the employer did not agree to arbitrate its claims.  To emphasize the lack of mutuality, the Court of Appeal pointed to differences between the arbitration agreement and another agreement, not at issue, in which the employer agreed to arbitration, as well.  Accordingly, the Court held the arbitration agreement was substantively unconscionable and, thus, unenforceable.  It affirmed the order denying arbitration.

Implications

Employers are reminded that the procedure by which they enter into arbitration agreements with their employees is as important as the agreement’s language.  In this case, the Court of Appeal’s analysis centered on the method by which the employer obtained the employees’ agreement, which it found irreparably flawed, i.e., in an employment application, with no explanation.  The one-sidedness of the employer’s procedure and the lack of mutuality led the Court to declare the agreement unconscionable. 

California employers should consider reviewing their arbitration agreements and the procedures they use to obtain employee consent to determine whether changes are needed to lessen the risk that the agreement will be found unconscionable and unenforceable. Allowing the applicant or employee a sufficient opportunity to opt out of arbitration, for example, is one avenue suggested by this case.  Jackson Lewis attorneys can assist in implementing this and other strategies.

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