Arbitration Agreement in Employee Handbook Held Unenforceable in California

The California Court of Appeals has found that that an arbitration agreement contained in an employee handbook was unenforceable where the agreement to arbitrate was a contract of adhesion (and therefore unconscionable), failed to give adequate notice of the arbitration rules that would apply and lacked mutuality. Zullo v. Superior Court, No. H036242 (Cal. Ct. App. Jul. 12, 2011).

The plaintiff, a former employee, alleged that she was discriminated against her because of her race and national origin and that she was terminated for complaining about being mistreated. The plaintiff acknowledged receipt of the employee handbook, which contained an arbitration agreement. The agreement stated that “any dispute arising out of the termination… of any employee’s employment… or any claim for discrimination or harassment arising out of any employee’s employment… shall be submitted to final and binding arbitration ….”  It also provided that binding arbitration was the “exclusive” means of resolving employment disputes.

Despite the arbitration clause, the plaintiff filed a lawsuit for wrongful termination. Her former employer moved to compel arbitration based on the agreement. The trial court granted the motion, and the plaintiff appealed. The Court of Appeals reversed. According to the Court the arbitration agreement was unconscionable because it was a contract of adhesion and was contained in a handbook with other policies and employees were required to sign the handbook and could not negotiate any terms. The Court also found the absence of the arbitration rules in the handbook made the agreement unconscionable because it required the employee to determine the applicable rules on his/her own. Finally, the Court found that the agreement was unfair because it applied only to claims that could be brought by an employee, but not by the employer. The Court therefore reversed and ordered the trial court to vacate its order compelling arbitration.

Employers in California must be careful in drafting arbitration agreements. While some arbitration agreements may be enforceable, courts will look to see if the agreement is limited in scope and provides the employee with all of the relevant information necessary to agree to arbitration and whether the agreement applies to both parties.