California possesses the reputation for posing special problems for employers doing business within the state. Not only are the employment rules complicated and extensive, but California juries are notorious for awarding extremely high verdicts against employers. Many employers believe that one way to avoid the risk of a high jury verdict is to require that their employees agree to arbitrate all disputes arising from their employment as a condition of their employment.
This assumption may no longer be valid. On August 24, 2000, the California Supreme Court, in Armendariz v. Foundation Health Psychcare Services, Inc., 2000 Cal.LEXIS 6120 (2000) held that mandatory employment arbitration agreements are enforceable in California (at least as to state law claims) provided they meet certain minimum requirements. These new requirements, however, have significant ramifications upon both the validity and the desirability of present employment arbitration agreements. As a result, all California employers with arbitration clauses in their employment contracts should review these clauses both to ensure compliance with Armendariz, and should consider whether, following Armendariz, they should scrap arbitration a mechanism for resolving employment disputes.
The Requirements of a Valid Employment Arbitration Agreement
In Armendariz, the plaintiffs were employees who had signed a specific employment agreement containing an arbitration clause. The arbitration clause provided that in exchange for employment, the employee agreed to arbitrate all employment termination disputes. The employer also agreed that in any such arbitrations, the employee's remedies would be limited exclusively to back pay. The employee waived all other legal remedies, including rights to emotional distress and punitive damages and attorneys' fees. Moreover, only the employee agreed to arbitrate claims; the employer was still free to file a legal action against the employee. The arbitration agreement also severely limited the parties' rights to engage in discovery procedures during the arbitration.
The Supreme Court held that the arbitration clause at issue was unenforceable. It held that an arbitration clause cannot effect a waiver of substantive protections provided to employees under state statutes, and in particular, anti-discrimination statutes. To hold otherwise, the court opined, would permit private parties to contract to avoid the state's public policy...