Employers often require employees to sign pre-employment contracts that contain an arbitration clause or agreement as a condition of being hired. These mandatory arbitration agreements may be unenforceable in California if they are found to be unconscionable.
The unconscionability analysis first depends on whether the contract is a contract of adhesion, which is defined as a standardized contract that is imposed and drafted by a party with superior bargaining strength and that gives the other party the option to only adhere to the contract or reject it. Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83, 113 (2000).
Unconscionability has two elements – 1) procedural and 2) substantive. Procedural unconscionability focuses on oppression or surprise due to unequal bargaining power, and substantive unconscionability relates to overly-harsh or one-sided results. Id. at 114. Both procedural and substantive unconscionability must be present in order for the agreement to be unenforceable, but they need not be present in the same degree and a sliding scale approach is used in the analysis. Id. Therefore, if the agreement is more substantively unconscionable, the less procedurally unconscionable the agreement must be in order to find the agreement unenforceable, and the more procedurally unconscionable the agreement is, less evidence of substantive unconscionability is required. Id.
Mandatory employment arbitration agreements are procedurally unconscionable if they are imposed on employees as a condition of employment and there is no opportunity for the employee to negotiate with the employer. Id. at 115. The California Supreme Court has noted that most employees experience economic pressure to sign such agreements because they are not in a position to refuse a job because of the arbitration requirement, and that while arbitration has its advantages in terms of greater expedition, information, and lower cost, it has potential disadvantage to the employee because it reduces the size of the award an employee may obtain, particularly if the employer is a “repeat player” in arbitration. Id.
Mandatory employment arbitration agreements can be found to be substantively unconscionable if they are one-sided and only requires the employee to arbitrate claims. Id. at 120.
Where the employee’s claims arise from unwaivable public rights, in addition to being conscionable, the arbitration agreement must satisfy the following five requirements: “(1) neutral arbitrators, (2) more than minimal discovery, (3) a written award, (4) all types of relief that would otherwise be available in court, and (5) no additional costs for the employee beyond what the employee would incur if he or she were bringing the claim in court.” Fitz v. NCR Corp., 118 Cal. App. 4th 702, 712-713 (2004).
Therefore, employers who require newly hired employees to sign arbitration agreements should make sure that the agreement is not unconscionable.