Arbitration Provisions in Employment Applications

California employers need to be careful when including mandatory and binding arbitration provisions and other similar provisions in their employment applications.

In a recent Ninth Circuit case – Schavarria v. Ralph’s Grocery Company (9th Cir. 2013) 733 F 3rd, the Court upheld the district court’s finding that Ralph’s arbitration clause in its employment application was procedurally unconscionable and substantively unconscionable.

The court found that agreeing to Ralph’s arbitration policy was a condition of applying for employment and the policy was presented on a “take it or leave it” basis with no opportunity for negotiating its terms. This made the provision procedurally unconscionable.

Several provisions made the policy substantively unconscionable, among them:

  • The policy barred selection of an arbitrator proposed by the party demanding arbitration. Therefore, the Court found the policy would always produce an arbitrator proposed by Ralph’s (the employer) in employee-initiated arbitration proceedings.
  • The arbitration provision also provided that each party needed to bear its own fees and costs, including attorney’s fees and arbitrator’s fees. The policy mandated that the arbitrator costs and fees must be paid by the parties up front before resolving the merits of the claims, and the policy required the arbitrator to apportion costs equally between Ralph’s and the employee disregarding any potential state law that might apportion the costs on the merits. Only a decision of the United States Supreme Court that directly addressed the issue could alter Ralph’s cost allocation term. The Court found that this effectively precluded the employee from recovering those costs making many claims impracticable.

Northern California employers should remember that when drafting policy provisions that must be followed by all employees, the policy should not unfairly restrict the employee’s access to redress the employer’s actions.