16 Oct

Limitations on Arbitration Agreements in Employment following OTO, L.L.C. v. Kho and AB 51

by and

It has been an eventful couple months for arbitration agreements in employment with the California Supreme Court’s ruling in One Toyota of Oakland, OTO, L.L.C. v. Kho (2019) 8 Cal.5th 111 (OTO) and the passage of AB 51. Employers will need to carefully review their arbitration agreements and practices to ensure they are compliant. This article will break down what we learned from OTO and AB 51, and what employers can and cannot do moving forward.

The California Supreme Court granted review in OTO to decide whether an arbitral scheme resembling civil litigation can constitute a sufficiently accessible and affordable process (i.e., replace the Berman Hearing[1]). But the Court found the arbitration agreement in OTO involved an unusually high degree of procedural unconscionability and was sufficiently substantively unconscionable that it rendered the agreement unenforceable.[2] Thus, the Court issued its ruling on the basis of unconscionability without resolving the initial question. As a result, it is unknown whether a litigation-like arbitration procedure may be an acceptable substitute for the Labor Commissioner’s Berman process in other circumstances. We do know, however, that an employee may not be coerced or misled into accepting this trade. 

Following OTO, employers may be wondering what constitutes procedural unconscionability. This is a fact specific inquiry, though employers can learn from OTO what procedures are problematic. For example, in OTO, the court found the combination of these circumstances unacceptable: the arbitration agreement was presented to the employee in his workspace with several other documents; the employee was required to sign the agreement to keep the job he had held for three years; any time the employee spent reviewing the agreement would have reduced his pay; the employer sent a low-level employee to wait for the agreement to be signed (conveying the impression that negotiation efforts would be futile); the agreement was not in the employee’s first language; the contents of the agreement were not explained to him; and the employee was not given a copy of agreement he signed. What’s more, the arbitration agreement was within a document titled “Comprehensive Agreement—Employment At-Will and Arbitration.” The Court noted that although the title of the document was a “comprehensive” employment agreement, “the one and one-quarter page contract [was] merely an arbitration clause grafted onto an acknowledgment of at-will employment.”[3] Finally, the Court labeled the arbitration clause a “paragon of prolixity” because it was contained in a dense, single-spaced paragraph, with complex sentences, filled with statutory references and legal jargon and written in a small typeface that filled almost an entire page. The Court concluded that under these circumstances, it would have been nearly impossible for the employee to understand the contract’s meaning and he had no real opportunity to ask questions or negotiate its terms.  Thus, considering the totality, the agreement was procedurally unconscionable and invalid. 

The lessons from OTO are simple. Arbitration agreements should be drafted in simple terms that are easy for employees to understand. These simple arbitration agreements should be presented to employees in a simple manner, by a person in management who can explain the terms, answer questions, and meaningfully respond to employee concerns. Employees should be given as much paid time as needed to review and consider the agreement. Employers should translate the agreement for employees who are not native English speakers or, if possible, provide an opportunity for the employees to discuss the agreement with someone in management who speaks their native language. Lastly, as discussed below, AB 51 will make it improper to require employees to sign an arbitration agreement as a condition of employment.

AB 51, signed by Governor Newsome on September 13, 2019 and set to become effective on January 1, 2020, adds a new section to the Labor Code – section 432.6, and creates a cause of action under Government Code section 12953 for violation. The new Labor Code section 432.6 prohibits employers from requiring any applicant for employment or any employee to waive any right, forum, or procedure under the California Fair Employment and Housing Act (FEHA) or the Labor Code as a condition of employment, continued employment, or the receipt of any employment-related benefit. In other words, employers cannot make mandatory arbitration of FEHA and Labor Code claims a condition of employment. Further, section 432.6 indicates that if an agreement requires employees to “opt out” of a waiver or take any affirmative action to preserve their rights, the agreement is deemed a condition of employment and violative of section 432.6. Finally, Government Code section 12953 authorizes injunctive relief and attorney’s fees to any plaintiff who proves a violation of the section 432.6, including any threatened or actual retaliation against an individual who refuses to consent to the forbidden requirements.

While AB 51 creates considerable challenges in obtaining arbitration agreements from employees, it does not create an outright ban on arbitration agreements. First, AB 51 only applies to agreements entered, modified, or extended, on or after January 1, 2020. Thus, before year-end, employers can require arbitration agreements as a condition of employment for both current and prospective employees, but they must allow current employees to opt-out.[4] Employers should also consider allowing prospective employees to opt-out, as the lack of an opt-out provision is a factor the courts consider when determining whether the agreement is unconscionable and, therefore, unenforceable. After January 1, 2020, employers will be limited to voluntary arbitration agreements for both existing and prospective employees – meaning, the employee is only covered by the agreement if he/she/they take affirmative action to sign it. Existing and prospective employees could choose not to sign the agreement and the employer could not retaliate against the employee for this choice.    

Despite its passage, AB 51 is positioned to be challenged on the grounds that it is preempted by federal law—specifically, the Federal Arbitration Act (FAA). The FAA’s purpose is to ensure the validity and enforcement of arbitration agreements. State laws that restrain the enforceability of mandatory arbitration agreements have been systematically struck down by the United States Supreme Court as preempted by the FAA. AB 51 prevents employers from imposing mandatory arbitration agreements on employees and prospective employees, but it does not necessarily interfere with the validity and enforcement of arbitration agreements. This issue will likely be litigated, and AB 51 may not become effective as currently scheduled on January 1, 2020. Meanwhile, employers should consult with legal counsel regarding their arbitration agreements and associated practices. 

Andrews Lagasse Branch + Bell LLP can assist employers with questions regarding arbitration agreements, opt-out provisions, and procedures for presenting arbitration agreements to employees. For more information, please call Jennifer Branch, Esq. at 858.345.5073 or Melissa Lewis, Esq. at (858) 284-0838.


[1] Berman Hearing refers to the hearing for an employee’s wage claim before the California Labor Commissioner under Labor Code section 98 et. seq. For the employee to obtain a Berman Hearing they need only file a complaint with the Labor Commissioner, there is no cost or complicated procedure involved.

[2] The unconscionability doctrine has both a procedural and a substantive element. Procedural unconscionability focuses on the circumstances of contract negotiation and formation, focusing on oppression or surprise due to unequal bargaining power. Substantive unconscionability focuses on the fairness of an agreement’s actual terms and assesses whether they are overly harsh or one-sided. (Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2012) 55 Cal.4th 223, 246; OTO 8 Cal.5th at 124.) Both procedural and substantive unconscionability of a contract must be shown for unconscionability to be established, but they need not be present in the same degree; instead, they are evaluated on a sliding scale. (OTO, 8 Cal.5th at 125.)

[3] OTO, 8 Cal.5th at 119.

[4] The California Supreme Court in Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114–115, opined that when an arbitration agreement is imposed on an employee as a condition of employment and there is no opportunity to negotiate, the arbitration agreement is adhesive. (An analysis of procedural unconscionability begins with an inquiry into whether the contract is one of adhesion). The court also recognized that “in the case of preemployment arbitration contracts, the economic pressure exerted by employers on all but the most sought-after employees may be particularly acute, for the arbitration agreement stands between the employee and necessary employment, and few employees are in a position to refuse a job because of an arbitration requirement.” (Id.  at 115.)