California Employment Law : Employment Lawyer & Attorney : Fox Rothschild Law Firm : San Francisco, Oakland, Los Angeles, San Diego

I was speaking to a group of women entrepreneurs last week for Women in LAVA, a great group chaired by my partner Emily Yukich. The topic was Hiring for Startups and I was presenting the legal side of how to hire and onboard to limit risk. My theme was: An Ounce of Prevention is Worth a Pound of Cure.

To that end, there are three things that every California employer should have, regardless of whether you have five employees or five thousand: (1) an employee handbook that sets forth your policies and expectations; (2) a confidentiality agreement that clearly defines and allows you to protect the key aspects of your business; and (3) an arbitration agreement.

Common mistakes include: Preparing these documents without regard to the particularities of the business (such as defining) “confidential information” in a way that is nonsensical for their company), or having the three documents contradict instead of cross-reference each other. Another common mistake is to fail to update these document periodically, as the business grows and as the applicable law changes. The policies a business needs change with different thresholds of employees, especially small businesses when they hit 25 and 50 employees.

And finally, there tends to be a lot of confusion over when a business should enter into an employment agreement with employees. Put simply, most agreements define employment for a particular term, and typically provide the employee with some comfort level as to pay and benefits during a defined period of time. An employment agreement may be necessary for a key executive, but is more than most businesses need for the vast majority of their workforce. Rather, what most employers need is an offer letter which provides employers with more flexibility and explains the concept of employment at-will (i.e., employment for no particular amount of time, no guarantees, and that can end with or without notice or cause). The offer letter should reference the policies in the handbook, the confidentiality agreement, and the arbitration agreement, and should not set forth any terms or concepts that contradict those documents. While you can have an employment agreement providing for employment at-will, I find that many such agreements contain contradictory terms (such as employment for a particular time period or termination for cause), and typically do not recommend it.

Taking some time to set up these documents at the onset is the best way to protect your business as it grows. It is a much better option than spending your time, energy and money fixing issues in response to an employee complaint, or worse yet a lawsuit, agency charge or attorney demand letter. Remember, an ounce of prevention is worth a pound of cure.
 

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This week brought some good news for employers seeking to enforce class and representative action waivers in arbitration agreements in California. In Iskanian v. CLS Transportation [pdf], the Court of Appeal applied the recent holding of the United States Supreme Court in AT&T Mobility v. Concepcion and upheld the dismissal of a pending wage-and-hour class action in state court. Congratulations to Fox Rothschild and the entire defense team for this winning decision.

There are a few key aspects of this case that will impact this area of the law going forward.

First, while California courts had previously followed the standards articulated by the California Supreme Court in Gentry v. Superior Court which essentially held that class action waivers in arbitration agreements were not viable in the employment context, this case held otherwise. In fact, the Court of Appeal specifically held that “the Concepcion decision conclusively invalidates the Gentry test.”

Second, the Court declined to follow a recent NLRB decision, D.R. Horton, holding that a class action waiver interfered with employees’ section 7 rights under the National Labor Relations Act to engage in collective activity, and therefore was unenforceable. Since the Federal Arbitration Act is not a statute the NLRB is charged with interpreting, the Court of Appeal held that it was under no obligation to defer to the NLRB’s analysis.

Third, as to the PAGA claim, the Court “respectfully disagreed” with another recent Court of Appeal case, Brown v. Ralphs Grocery Co. [pdf], which many of us believe should not be prevailing law. Instead, the Court held that Concepcion does apply to representative actions under PAGA, and that a waiver of PAGA representative actions is enforceable under California law.

What does this case mean to you? California attorneys now have published and binding authority to cite when supporting the enforceability of a class action waiver in an arbitration agreement. But there is also now conflicting authority on this issue in California, and plaintiff’s counsel in this case has indicated an intent to appeal to the California Supreme Court. So stay tuned for further developments. Even so, no matter what happens, if you have an arbitration agreement without a class action waiver, then it may be time to add one.
 

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Some of the more recent cases to strike down workplace arbitration agreements complained that the agreements didn't include a copy of the applicable arbitration provider’s rules. One of these, Wisdom v. AccentCare Inc. (pdf), is awaiting review by the California Supreme Court. Another, Mayers v. Volt Management Corp. (pdf), is the subject of a pending petition for review. While we wait to see whether employers in California will be required to attach a copy of the arbitration provider’s rules to every arbitration agreement, let me explain why any such requirement is unreasonable and unworkable.

As a practical matter, requiring that the arbitration rules be attached to an agreement prevents the parties from agreeing in advance to use the rules in effect at the time the dispute arises (since future versions obviously can’t be attached). This is important because California and federal laws defining the requirements for an enforceable arbitration provision in the employment context have undergone continuous evolution.

Like other arbitration providers, the American Arbitration Association has modified its rules repeatedly in response to changes in the law. As one example, before 1997, the AAA rules did not say how the arbitrator’s fees were to be borne between the parties. In 2000, the California Supreme Court in Armendariz held that the employer must bear most of the fees. In response, AAA revised its rules to limit the employee’s contribution to $175. Any agreement attaching the AAA rules from before that change would have been rendered unenforceable once the state supreme court decided Armendariz.

That’s just one example. More recently, AAA issued new employment arbitration rules in 2006, in June 2009, November 2009, and in 2010. Insisting that the parties agree to use the AAA rules in effect when the agreement is executed puts the employer in the impossible position of having to either anticipate future legal developments or face the likelihood that the rules in effect when the agreement is signed (frequently near the time of hire) will be rendered invalid by later changes in the law.

I’m not talking about the situation in some older cases where the rules referenced were blatantly one-sided and all but inaccessible. This is 2012. We have the internet. Use of a reputable arbitration provider and a link to its rules on its website adequately protects employee rights. Any contrary holding demonstrates that state courts are merely paying lip service to the principle that arbitration agreements stand on an equal footing with other contracts.

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In 2000, the California Supreme Court used its decision in Armendariz v. Foundation Health Psychcare Services to articulate minimum requirements for employment arbitration agreements. Last year, in AT&T Mobility LLC v. Concepcion, the U.S. Supreme Court reiterated that the Federal Arbitration Act preempts state laws that “stand[] as an obstacle to the accomplishment and execution of the full purpose and objectives of [the FAA].”

From my admittedly biased perspective, a number of the Armendariz requirements run afoul of Concepcion. Where, for example, did the requirement of “a modicum of bilaterality” come from? And if federal law preempts limitations on arbitration, how can a state court dictate what level of discovery is required and how much detail must be included in a written decision?

More recently, one California appellate case struck down an arbitration agreement for not providing the employee with a copy of the American Arbitration Association rules. The defendant in that case – Mayers v. Volt Management – has petitioned for review. Last week, the California Supreme Court granted review in Wisdom v. AccentCare, which found an arbitration agreement substantively unconscionable because the acknowledgment said "I agree . . . " instead of "we agree . . . " and that evidenced a lack of mutuality.  

There is no doubt that there are judges at all levels of our state court system who are hostile to the idea of mandatory workplace arbitration. The frequency with which they announce new requirements makes it impossible for employers to keep up. If the California Supreme Court doesn’t rein them in, expect the U.S. Supreme Court to intervene. Until then, add this to the areas of California employment law that are rife with uncertainty.

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Last week I participated on a panel that presented "50 Legal Tips in 50 Minutes" at the Cornell HR in Hospitality Conference.  Our goal was to provide 50 practical and pithy tips for HR practitioners.  The presentation was well received.  For a summary of tips 1-26 click here; for a summary of tips 27-50 click here.

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Has this ever happened to you?  Your boss comes back from a seminar or shoots you an email that says “we need a policy on [you fill in the blank here: social media, whistle-blowing, cell phones].”  So you rush to download a policy from the Internet, and distribute it to employees to address the hot issue of the moment.  Good idea?  No.  In fact, it is one of my pet peeves.

Every California employer, large or small, needs three things: (1) an Employee Handbook that addresses California specific issues; (2) a comprehensive Confidentiality Agreement to protect the company’s information to the greatest extent possible; and (3) an Arbitration Agreement (this one is optional, but given the legal trend nationwide, generally a good idea for many businesses and worth considering).

All three of these documents should be drafted as a set, so that they don’t unintentionally contradict each other.  For example, your Confidentiality Agreement should not allow the employer to go to court for a TRO when your Arbitration Agreement provides otherwise.

The Employee Handbook should be the place for all policies, and should be updated annually, preferably at the same time each year.  Is January a busy time?  Then update the handbook every July or September.  There is no rule that says it has to be updated in January. 

Then when new policy issues come up, simply make a note of the issue, and incorporate it into the Handbook at the next revision.  Make sure the new policy is consistent with all of the policies already in place.  For example, a social media policy should be cross-referenced with your harassment, conflict of interest, employee references, and technology policies.  Have employees sign off on the updated handbook each year.

So next time someone rushes over to you and says “we need a policy on X,” impose some order on the process and don’t just react.  Your policies will be much better for it.

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Today, the Supreme Court decided AT&T Mobility v. Concepcion (pdf), a case we first reported on last June.  The plaintiffs in the underlying case filed a class action complaining about being charged sales tax on phones that AT&T advertised as "free" once you bought the service plan.   AT&T sought to enforce an arbitration provision in the sales contract and the plaintiffs countered that the provision was unconscionable because it required them to waive their right to proceed as a class action.  The 9th Circuit court of appeals held that the class action waiver was unconscionable under California law and that the Federal Arbitration Act did not preempt California law regarding unconscionability.

In an opinion issued today, the Supreme Court reversed in a 5 to 4 ruling that broke down along familiar ideological lines (Scalia, Roberts, Thomas, Alito, and Kennedy in the majority; Breyer, Ginsburg, Sotomayor, and Kagan dissenting). The majority argued that California’s rule disfavoring class action waivers in arbitration agreements (as articulated in Discover Bank v. Superior Court) was preempted by federal law encouraging arbitration. The dissent countered that this effectively left plaintiffs without a remedy since, as Justice Breyer phrased it, “What rational lawyer would have signed on to represent the [plaintiffs] in litigation for the possibility of fees stemming from a $30.22 claim?”

Most of the attacks on arbitration agreements in California involve the doctrine of unconscionability. The doctrine, which arises more from judicial decisions than legislative enactments, finds certain agreements unenforceable if they don’t meet specified requirements. Some of these, such as the requirement articulated in Armendariz v. Foundation Health Psychare Services that the agreements contain a "modicum of bilaterality," seem to reflect judicial suspicion (if not outright hostility) towards arbitration of employment claims.  This latest decision shows that the Supreme Court will not allow California unconscionability analysis to run amok. To that extent, it’s an encouraging development for employers.  And if class action waivers are now permissible in employment arbitration agreements, this provides a huge incentive for employers to have arbitration agreements with their employees.

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Sometimes cases from other areas of law can have a strong impact on employment law in California.  For example, Laster v. AT&T Mobility LLC involved class action waivers in consumer contracts.  Laster filed a class action complaining about being charged sales tax on phones that AT&T advertised as "free" once you bought the service plan.   AT&T sought to enforce an arbitration provision in the sales contract and Laster countered that the provision was unconscionable because it required him to waive his right to proceed as a class action.   The 9th Circuit court of appeals held that the class action waiver was unconscionable under California law and that the Federal Arbitration Act (FAA) did not preempt California law regarding unconscionability.

AT&T Mobility asked the Supreme Court to weigh in on the issue.  In doing so, it argued that class-wide arbitration is not necessary to protect the consumers' rights.  It further argued (pdf) that 

Class-wide arbitration affords none of the benefits of traditional, individual arbitration--it is at least as burdensome, expensive, and time-consuming as litigation--while multiplying the risks enormously because judicial review is so limited.

Finally, AT&T Mobility argued that the FAA preempts state law on this issue (including California law regarding unconscionability) as applied to arbitration agreements. 

Last week, the Supreme Court agreed to hear the matter (under the title AT&T Mobility v. Concepcion).  The decision, which is still many months away (oral argument has yet to be scheduled), could have a significant impact on California unconscionability analysis in the arbitration context.

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If you arbitrate employment disputes, then you may have seen that the limits on discovery vary from arbitrator to arbitrator.  Some allow interrogatories, some don't.  Some limit the number and length of depositions, some don't.  The American Arbitration Association's Employment Arbitration Rules don't provide much guidance, saying simply that:

The arbitrator shall have authority to order such discovery, by way of deposition, interrogatory, document production, or otherwise, as the arbitrator considers necessary to a full and fair exploration of the issues in dispute, consistent with the expedited nature of arbitration." 

Contrast that with the 70 pages or so of the California Code of Civil Procedure devoted to discovery and you can see how much flexibility and discretion arbitrators have in this area.

According to a California court of appeal decision published last week, Dotson v. Amgen, limits on discovery can be included in the arbitration agreement, itself.  In that case, the agreement stated:

Each party shall have the right to take the deposition of one individual and any expert witness designated by another party. . . .  Additional discovery may be had where the arbitrator selected pursuant to this agreement so orders, upon a showing of need.

The trial court found the provision unconscionable and refused to enforce the arbitration agreement.  But the appellate court disagreed.  It recognized that "arbitration is meant to be a streamlined procedure" and that the only way to achieve that streamlining is by limiting discovery.  

Employers creating (or revising) arbitration programs need to be aware of the judicially created rules for an enforceable arbitration agreement.  But as long as they meet those requirements, nothing prevents them from limiting discovery in the manner the Dotson decision upheld.  

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Many employers rely on arbitration agreements with their employees to control litigation costs.  But the right to require arbitration is under attack from various directions.  Here's a recent one.

On October 20, 2009, a California appellate court issued an opinion that left the door wide open for challenging binding arbitration awards.  In Burlage v. Superior Court, the dispute involved purchase of a home.  After the close of escrow, the buyers learned that part of what they were told was their property actually belonged to a neighbor.  They sued the seller, claiming he fraudulently failed to disclose the encroachments.  The arbitrator ruled that damages must be determined as of the close of escrow and excluded evidence of subsequent actions that lessened (practically eliminated) plaintiff's damages.  The trial court vacated the award and the buyers took a writ.

In a 2-1 decision, the appellate court affirmed the decision to vacate the award.  It based its decision on California Code of Civil Procedure section 1286.2 which allows a court to vacate an arbitration award where a party's rights "were substantially prejudiced . . . by a refusal of the aribtrator[] to hear evidence material to the controversy . . . ."  Because the arbitrator did not admit evidence of damages from a period of time he concluded was irrelevant, the court concluded that the award could be vacated.

The dissent characterized the arbitrator's decision as one as to when damages should be determined and explained that the law does not permit courts to overturn arbitration awards just because they would reach a different conclusion on a legal issue.  It noted that many legal rulings would necessarily result in determinations as to what evidence was or was not material to the controversy. 

The majority opinion also raised the question whether arbitrators, to avoid having their decisions vacated, might be more inclined to admit evidence.  It concluded, however, that that was an overly cynical view and that the decision would not impact evidentiary rulings.  It remains to be seen whether a little healthy cynicism might be justified here.

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