In 2019, the California Legislature passed Assembly Bill (“AB”) 51 which aimed to prohibit employers from requiring employees to sign mandatory arbitration agreements as a condition of employment. The United Stated Chamber of Commerce and several large businesses quickly filed suit in federal court, arguing that AB 51 was preempted by the Federal Arbitration Act (“FAA”). In early January 2020, the court issued a preliminary injunction, holding that California could not enforce AB 51. California subsequently appealed the ruling, which is working its way through the 9th Circuit.
The court’s injunction means that employers can continue to require employees to sign mandatory arbitration agreements as a condition of employment. The ruling, however, does not mean that all arbitration agreements are enforceable, a fact highlighted in the recent decision of Ali et al. v. Daylight Transportation, LLC (Dec. 4, 2020, No. A157104) ___Cal.App.5th___ [2020 Cal. App. LEXIS 1255].
In Ali, the defendant, Daylight Transportation, coordinated shipments of goods throughout the United States. The plaintiffs in the case were a class of drivers who transported goods for Daylight Transportation within California. Daylight Transportation employed the drivers as independent contractors, but the drivers argued they were misclassified and entitled to California Labor Code protections concerning minimum wages and meal and rest breaks.
Daylight Transportation filed a motion to compel arbitration based on arbitration agreements that the drivers were required to sign prior to any work assignment. The trial court denied the motion, holding that the arbitration agreement was unconscionable and unenforceable. Daylight Transportation appealed the ruling, but the appellate court affirmed the lower court’s ruling.
The appellate court started with the premise that arbitration agreements are favored under laws such as the FAA. The agreements, however, are subject to the same test for unconscionability as any other contract. For a contract to be unconscionable, it must be both procedurally and substantively unconscionably. Procedural unconscionability “addresses the circumstances of contract negotiation and formation, focusing on oppression or surprise due to unequal bargaining power.” Substantive unconscionability “pertains to the fairness of the agreement’s actual terms and to assessments of whether they are overly harsh or one-sided.”
The Appellate Court agreed with the District Court’s findings that the arbitration agreement was both procedurally and substantively unconscionable. Procedurally, the arbitration agreement was an adhesion contract, meaning it was presented to the drivers on a take-it-or-leave-it basis. The drivers could not negotiate the terms of the agreement and needed to accept the agreement to be able to drive. The arbitration agreement was also not presented in an obvious manner. The arbitration agreement, rather, was the 27th of 39 clauses, was buried on page 15 of the contract, and used the same small font as the rest of the agreement. The contracts were also presented to the drivers in ways that did not permit them time to have counsel review the agreement. Drivers testified that they had as little as one day to review and return the signed contract or they would miss out on the employment opportunity. The arbitration agreement was governed by the American Arbitration Association’s (“AAA”) Commercial Arbitration Rules. The agreement, however, did not list the AAA’s rules and Daylight Transportation did not provide the drivers a copy of the rules. As such, the court held that parts of the agreement were “artfully hidden,” including the fact that the AAA’s rules require both parties to equally share the cost of litigation.
The arbitration agreement was also substantively unconscionable for three reasons. First, the agreement established a 120-day statute of limitations. This was unconscionable because it was substantially shorter than the three-to-four-year statute of limitations for most employment cases. Second, the agreement permitted Daylight Transportation to bypass the arbitration agreement for “provisional remedies,” such as injunctive claims, but it did not provide the same exception for the drivers. The one-sided nature of this provision was unconscionable. Third, the cost-sharing requirement was unconscionable because the high cost of arbitration acted as an impermissible deterrent to the drivers’ ability to proceed with litigation.
Ali et al. v. Daylight Transportation shows how important it is to have a well drafted arbitration agreement. The decision provides guidance for avoiding claims of unconscionability:
- The arbitration agreement should be a stand-alone document and not plugged into a separate agreement or an employee handbook. If the arbitration agreement is part of a larger agreement, the arbitration clause should be prominent, using a different and larger font, and placed near the beginning of the document.
- Employers should provide employees with copies of all arbitration rules or include them in the agreement.
- Employers should pay all arbitration fees. (Employees may be responsible for fees up to and including the fees they would ordinarily be responsible for in a civil action, such as court filing fees).
- Employees should be given sufficient time to review the agreement with counsel before signing.
- The arbitration agreement should provide employees with reasonable times to bring lawsuits, similar to those provided by statute.
- Employers should consider a voluntary arbitration agreement over a mandatory agreement.
Gibbs Giden will continue to monitor the status of AB 51 as it works its way through the courts. For more information contact:
Matthew Wallin is a senior associate in the Los Angeles office where he practices labor and employment law. He has extensive experience defending private business and public entities in litigation involving discrimination, harassment, retaliation, and wage and hour disputes. He has also defendant against assault and workplace violence claims.
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