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Should I Require Key Employees to Sign an Arbitration Agreement?

Most employers, as well as other business people, have increasingly turned to arbitration agreements for a variety of reasons. Among the reasons most commonly cited is the avoidance of the cost of employment litigation and the amount of time consumed by that litigation which can take years to reach resolution. One other valid reason for using these agreements that is often overlooked is the fact that disputes resolved by the arbitration process remain private with the details of both the dispute and its resolution kept out of the public domain. That is not the case with the judicial process as the records related to most lawsuits are a public record.

The arbitration agreement is generally presented to the employee at the time of employment and provides that any subsequently arising dispute between the employer and employee will be resolved through the use of some form of arbitrative rather than judicial process. The employee essentially waives the right to sue the employer. In many instances in the past, these agreements have been presented to the employee as a take-it or leave-it proposition and, in some instances, buried in a pile of other documents without giving the employee even the possibility of reviewing the agreement, let alone negotiating the terms of the agreement.

Although the United States Supreme Court has consistently held these agreements to be valid, California courts, as well as the California Legislature, have made clear that, at least in California, employment arbitration agreements should be the exception, rather than the norm. Indeed, in February 2015 Assembly Member Roger Hernàndez introduced Assembly Bill 465 (“AB 465”) seeking to add California Labor Code Section 925. If enacted, that section would have prohibited employers from requiring employees to sign arbitration agreements as a condition of their employment. While passed by the California Senate on August 24, 2015, Governor Brown ultimately vetoed AB 465 with a strongly worded veto message, citing, among other things, the California Supreme Court’s decision in Armendariz v. Foundation Health Psychcare Services, Inc.,24 Cal. 4th 83 (2000).

In Armendariz, the Court held that employment arbitration agreements are valid so long as they provide certain protections for the employee, including: (i) a neutral arbitrator; (ii) adequate discovery; (iii) no restriction on the amount of damages or remedies available to the employee in the arbitration; (iv) an arbitrator’s written decision; (v) judicial review of the decision; and (vi) a limitation on the costs to the employee of the arbitration process. In essence, the Court found that such agreements are valid and enforceable so long as they are not so one-sided in favor of the employer as to deprive the employee of all due process protections expected in a judicial setting.

While California employers should seriously consider the use of arbitration agreements with their key employees to avoid the publicity of disputes, as well as to reduce their litigation costs, both in terms of attorney’s fees and the time needed to defend against the claims of their employees, it is crucial that those agreements be properly drafted to ensure their viability and enforceability.

If you would like to arrange for a consultation to discuss an arbitration agreement with your key employees, or if you would like to discuss any other employment or business-related matter with a rising star, Michael Leonard, Esq. of San Diego Corporate Lawshould be your first call. He has the experience and knowledge to ensure all of your business agreements are enforceable in the California courts. He can be contacted by visiting San Diego Corporate Law or by telephone at (858) 483-9200.

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Schedule a Consultation: 858.483.9200