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5 Items California Employers Should Review On Arbitration Deals

February 07, 2014

​Dan McCoy, co-chair of Fenwick & West’s employment practices group, talked with Law360 about multiple issues California employers should look out for in arbitration agreements while awaiting the final court decision on enforceability of class action waivers in Iskanian v. CLS Transportation Los Angeles LLC.

One issue to consider is whether the cost of arbitration still makes it worth pursuing compared to the court system, as the arbitration process has grown more expensive over the last decade.

“There is much more discovery that occurs in arbitration and claims are dragged out,” said McCoy. “Arbitration can cost a significant amount even in a single-plaintiff case alleging wrongful termination or discrimination. Employers can easily spend six figures just on their own attorneys’ fees, and often it can be much, much more.”

Another issue to think about is whether a class waiver is even needed. While a large corporation might want a waiver to limit the chance of facing a major class action, a small startup should probably be less concerned, McCoy said.

“When I’m talking to a startup with 35 employees, I tell it that a class action waiver may be risky in terms of enforcement and may not give it all that much value,” McCoy said. “On the other hand, a company with thousands of employees is likely to be more desirous of having a waiver and may want to take the risk of installing one.”

But if a company is drafting an arbitration agreement from scratch, it may be better to leave a class waiver out, McCoy said. “The conservative, prudent course is that it’s better to wait and see before installing a class action waiver that is deemed unenforceable.”

Yet another issue in drafting an arbitration agreement is whether it complies with the California Supreme Court decision in Armendariz v. Foundation Health Psychcare Services, which found that mandatory employment arbitration deals must be bilateral.

“If an employer is going to have a mandatory arbitration agreement with employees, it has to be mutual so that both sides are subject to arbitration and so that other conditions are fair,” McCoy said.

Finally, an employer should review its arbitration agreement on at least an annual basis to keep it updated, McCoy told Law360.

“Not a day goes by where I don’t review a form an employer is using that is out of date. It was put in place 10 or 12 years ago when the terms and conditions were enforceable, but with the passage of time, the agreement has become unenforceable in some respects.”

Employers should avoid relying on stock agreements for the same reason, he added. “Don’t pull an arbitration agreement form off the Internet and assume it’s accurate and up to date,” McCoy said. “This is a fluid area of the law and the Iskanian case is a good example of that.”

The full article is available through the Law360 website (subscription required).