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Pair of cases shows how you can legally use arbitration, but standards are high

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in Discrimination and Harassment,Employee Benefits Program,Employment Law,Human Resources

With all the talk of runaway lawsuits and huge jury awards, plus attorneys’ fees, it’s no wonder employers may be tempted to require employees to agree to arbitrate all employment-related disputes.

But before you pull a boilerplate contract off the shelf or from the Internet, consider this: California has some of the toughest standards for arbitration agreements, and missing just one fine point can doom the entire agreement.

Two recent cases involving arbitration clauses in employment demonstrate the danger of relying on arbitration agreements to avoid litigation. Federal courts decided one case, while California’s appellate courts decided the other. Both found unconscionable the arbitration agreements employers used. Therefore they were invalid.

Case No. 1: Mark Gelow and several fellow employees worked as branch managers for a mortgage company. When their jobs were eliminated and several accounts that had been used to pay wages and benefits were frozen, the managers sued. They alleged that their former employer violated the Employee Retirement Income Security Act, committed fraud and breached its fiduciary duties when the accounts were frozen.

The company demanded the case be sent to arbitration, pointing to the arbitration agreements the managers supposedly signed. (Several said they did; Gelow and another co-worker said they didn’t.)

But the court looked at the few agreements the company produced and said none met California contract standards. Therefore, they weren’t valid.

For example, California law requires five elements in all arbitration agreements: (1) the use of a neutral arbitrator, (2) discovery rights, (3) the right to all remedies that would be available in court, (4) a written decision and (5) reasonable arbitration fees.

In this case, the agreement limited several rights, including the full scope of remedies available in court. That was enough to sink the arbitration agreement. (Gelow, et al., v. Central Pacific Mortgage, No. S-07-1988, ED CA, 2008)

Case No. 2: When Gina Ontiveros was offered a permanent full-time position with Airborne Express, the company presented her with a stack of documents to review and sign. One was a draconian arbitration agreement that purported to cover all disputes that might arise between Ontiveros and the company.

Ontiveros apparently signed the agreement, although she didn’t remember doing so. It included a waiver of the right to a jury trial, a limitation on discovery if she chose to arbitrate any claims and a statement that said she had the opportunity to consult counsel before signing. She testified that she really hadn’t had that opportunity, nor did anyone from the company tell her she could reject the agreement or change any of the terms.

Ontiveros sued, alleging long-term sexual harassment and failure to prevent that harassment. The company tried to force the lawsuit out of court and into arbitration.

The trial court said the agreement was invalid, and the Court of Appeal of California upheld the decision. It said the limitations placed on employee lawsuits were unconscionable. (Ontiveros v. DHL, No. A1484, Court of Appeal of California, 1st Appellate Division, 2008)

Final note: The contracts were also invalid because they were offered on a take-it-or-leave-it basis. Always have an experienced attorney draft any arbitration agreements. He or she can make sure the contract meets California’s strict contract standards. There’s no point to having an arbitration agreement that cannot be enforced.

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