What makes a mandatory arbitration agreement enforceable?

On Behalf of | Nov 20, 2023 | Employment Law |

Mandatory arbitration agreements between employers and employees have seen some ups and downs over the last few years in California. 

In 2019, Governor Newsom signed AB 51, adding a new section to the California Labor Code. For all intents and purposes, the goal was to stop employers from requiring a job applicant (or an employee) to sign arbitration agreements to get (or keep) their jobs. It was almost immediately challenged, and the Ninth Circuit Court of Appeals said that the Federal Arbitration Act (FAA) preempted AB 51.

That means mandatory arbitration agreements are once again possible in this state – but employers need to take care that they’re written in such a way that they’re actually enforceable. 

A recent ruling sheds some light on the issue

In Fuentes v. Empire Nissan, Inc., the Court of Appeals clarified that mandatory arbitration agreements can be invalid if they involve both (not either) procedural and substantive unconscionability

Procedural unconscionability may be the easier hurdle for an employee to make since that has to do with the inequality of bargaining power – which is usually a little bit in play between employers and employees when an employee’s job (or potential job) is on the line. Just the same, an employee may have a difficult time proving that they had no realistic alternatives except to accept the terms as presented.

Substantive unconscionability focuses on whether the terms of the agreement are overly one-sided, unfair or oppressive. It’s important to note that even if the terms of an agreement are hard to understand, that’s not substantively unconscionable. 

Because the legal landscape on mandatory arbitration agreements keeps changing, it’s wise to have experienced legal guidance when your company’s agreements are drafted.