Employers commonly use arbitration agreements with their workers and employees. California law strongly encourages arbitration agreements because it protects privacy, creates a smoother and less expensive process in the resolution of disputes, and provides an efficient handling of issues through a less burdensome process.
On November 3, the Ninth Circuit Court of Appeals provided an important decision in Martinez-Gonzalez v. Elkhorn Packing Co., which may be of great significance to California employers. The decision established limitations on liability under violations of federal and state labor and wage laws for employers who choose to include valid arbitration agreements in employee contracts. The Ninth Circuit’s considerations not only provide clarification, but additionally remind employers to account for, review, and update arbitration agreements as needed to make sure the arbitration agreement is valid according to Federal and California law.
Rescinding a Contract Under the Economic Duress Doctrine Is One of Last Resort
The Federal Arbitration Act provides that the enforceability of an arbitration agreement, is determined using “generally applicable contract defenses, such as fraud, duress, or unconscionability.”
Under California law, a contract signed under economic duress may be rescinded. However, California rescinds contracts under the economic duress doctrine under very limited circumstances. This doctrine is used sparingly, “reluctantly,” and “only in limited circumstances,” to be used when no other conventional alternatives and remedies exist. Economic duress occurs when one party commits a wrongful act that is sufficiently coercive to cause a reasonable person to believe he or she is faced with no reasonable alternative than to agree to the unfavorable contract. In Martinez-Gonzalez, the court held that Martinez-Gonzalez failed to show that Elkhorn Packing committed a wrongful act because reasonable alternatives were available to Martinez-Gonzalez, economic duress is a “last resort” doctrine, and construing the signing of arbitration agreement as a wrongful act “would place courts in charge of determining business necessities and would encumber, rather than promote, the ‘freedom of contract.’” The decision was clear in establishing that agreements are an arrangement that serve a practical business function, and unless these arrangements meet this higher standard of wrongfulness, they do not constitute as wrongful acts.
An Employee’s Socioeconomic Background is Insufficient in Making an Arbitration Agreement Unlawful
The Ninth Circuit further emphasized that an employee’s personal, unpleasant, or unideal circumstances are insufficient grounds to invalidate an otherwise valid arbitration agreement. In Martinez-Gonzalez, Martinez-Gonzalez claimed that because he was obtaining a visa through his employer, he believed that he would not be given work and sent back to Mexico if he refused to sign the arbitration agreement, that he had to stand in a lengthy line with the other workers to sign the agreement while being encouraged to sign it, and that he was not told that he could refuse to sign the agreement. The Ninth Circuit reasoned that these circumstances, while not ideal, do not rise to a level of “wrongful conduct” under California law.
Under California law, an objective test is used to determine whether an employee had reasonable alternatives. An employee’s mere speculation about his termination should he refuse to sign an arbitration agreement, even if justified or “highly likely,” cannot be used to prove a lack of reasonable alternatives. The economic duress doctrine requires that there be no reasonable alternatives, indicating the employee is coerced into the agreement. This court found that the need for a job and money offered under the agreement does not constitute economic duress, even when rejecting the agreement leads to loss of income, as an employee can make up for lost opportunities. Further, nothing in the contract nor the actions of the employer indicated that signing the arbitration agreement was a condition of employment. Rather, an employer may encourage the signing of a valid arbitration agreement, and encouragement is a “far cry” from “coercion or denial of choice.”
The Ninth Circuit additionally refused to find the arbitration agreement invalid under an undue influence theory. A totality of circumstances analysis is used to determine undue influence, including factors such as (1) discussion of the transaction at an unusual or inappropriate time; (2) consummation of the transaction in an unusual place; (3) insistent demand that the business be finished at once; (4) extreme emphasis on untoward consequences of delay; (5) the use of multiple persuaders by the dominant side against a single servient party; (6) absence of third-party advisers to the servient party; and (7) statements that there is no time to consult financial advisers or attorneys.
Employers Should Consider Reviewing and Updating Arbitration Agreements
While Martinez-Gonzalez v. Elkhorn Packing provides good news to employers that an otherwise valid arbitration agreement cannot be so easily invalidated by raising economic duress and other less than ideal circumstances and situations, employers are still responsible to ensure their arbitration agreements are enforceable and valid. Employers should review and update arbitration agreements to comply with California and Federal law as needed to avoid potential liability and violations.
On September 15, 2021, the Ninth Circuit upheld Assembly Bill 51, which prohibits mandatory arbitration agreements, and requires arbitration agreements between employees and employers to be consensual, rather than a condition of employment. This resulted in the creation of Labor Code § 432.6, which bans mandatory employment arbitration agreements in California. Therefore, employers should review their arbitration agreements to assess whether the agreement requires applicants or employees to sign an arbitration agreement. Where it is an unlawful employment practice for employers to mandate arbitration agreements, providing clear language that informs the employee that the arbitration agreement is not a condition of employment, or providing a revocation period within the contract, could alleviate risks of potential liability and violations of labor and wage laws.