California Pre-Employment Arbitration Agreement Ruled Unconscionable

Including arbitration provisions in employment agreements or employee handbooks is not a guaranteed way to avoid the courtroom. On January 3, 2012, the California Court of Appeal upheld a decision from the Sacramento County Superior Court holding that an arbitration provision contained in a pre-employment agreement was unconscionable, and, therefore, unenforceable.

In Wisdom v. AccentCare, Inc. (Super. Ct. No. 34-2009-00063028 CU OE GDS), the plaintiffs filed a complaint alleging they were not paid for all of the overtime and time they spent handling off-hour calls while they were employed by AccentCare as on-call staffing coordinators.

When they applied for a job with AccentCare, four of the six plaintiffs signed an acknowledgment form titled: “Acknowledge Your Understanding of the following Statements and Agreements by Placing Your Initials in Each Paragraph, then Sign and Date Below.” One of the paragraphs was an arbitration agreement that stated:

“I hereby agree to submit to binding arbitration all disputes and claims arising out of the submission of this application. I further agree, in the event that I am hired by AccentCare, that all disputes that cannot be resolved by informal internal resolution which might arise out of my employment with AccentCare, whether during or after employment, will be submitted to binding arbitration. I agree that such arbitration shall be conducted under the rules then in effect of the American Arbitration Agreement.”

After the lawsuit was filed, AccentCare sought to compel arbitration based on the signed acknowledgments. The trial court denied the motion on the ground that the arbitration agreement was unconscionable, and the Court of Appeal affirmed the judgment.

First, the trial court noted that the plaintiffs were not informed that signing the agreement was optional, and the heading indicated that signing was mandatory. Second, there was unequal bargaining power between the parties as few employees are in a position to refuse a job because of an arbitration agreement, and the nature of the employer-employee relationship leads to an inherent power imbalance. The agreement also implied that there was no opportunity to negotiate its terms as the other statements the applicants were directed to acknowledge were terms that an applicant would not expect to negotiate. For example, that the statements in the application were true, that AccentCare could investigate the applicant’s references, that AccentCare is a smoke-free and drug-free workplace, and that employment would be at-will.

The trial court also stated that an element of surprise was present because the arbitration agreement was located in the middle of five uniform, single-spaced paragraphs, and was not distinguished in any manner, the meaning of the agreement was not explained, and the plaintiffs did not know what “binding arbitration” meant. Thus, the employees’ reasonable expectation that they were entitled to a trial was disappointed.

Further, the trial court held the agreement was unenforceable because it was not mutual – there was no language indicating AccentCare agreed to submit to arbitration. The trial court noted the one-sidedness of the agreement due to the unambiguous phrases “I hereby agree” and “I agree,” and pointing out that only the applicant signs at the bottom of the form.

Lastly, the agreement stated that arbitration would be conducted under the rules of the American Arbitration Association, but the rules were not attached. Thus, the employee is “forced to go to another source to find out the full import of what he or she is about to sign — and must go to that effort prior to signing.”

This decision is yet another signal that enforcing pre-employment arbitration agreements continue to be increasingly difficult for employers. Employers should review their arbitration agreements with their legal counsel to determine whether any changes should be made to reduce the risk that the agreement will ultimately be deemed unenforceable.