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Arbitration Delegation Clauses — Another Employer Tool To Enforce Arbititration Agreements

More good news for California employers on the employment arbitration front.

Within one month, we have two California courts of appeal ensuring employment arbitration agreements are enforced according to their terms, as they should be.

The cases are Tiri v. Lucky Chances, Inc. (5/14/2014) and Malone v. Superior Court (6/17/2014).

So what’s an arbitration “delegation clause?” If the arbitration agreement itself delegates issues concerning enforceability or interpretation of the arbitration agreement to the arbitrator, then courts don’t get to decide whether the agreement is unconscionable.

Here’s the delegation clause from the Tiri case:

The Arbitrator, and not any federal, state, or local court or agency, shall have the exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability, or formation of this Agreement, including, but not limited to, any claim that all or any part of this Agreement is void or voidable.

Why is this good? If you are an employer and you and your employee have agreed to arbitrate any and all disputes/claims arising out of or related to your employment relationship you want that agreement enforced. If a court can rule your arbitration agreement is void or voidable (and California courts have been hostile towards arbitration), would you rather have the court decide or have the arbitrator you want to be in front of anyway decide? Exactly, you want the arbitrator to decide, not the court.

Essentially you now have another way to get into arbitration immediately with minimal court intervention.

How? Let’s say employee sues you in court. Employee sues you not only for themselves, but on behalf of 50 coworkers “similarly situated,” a.k.a. via class action. Employee thinks he is vindicating his and his coworkers’ rights, and he and his attorney will be able to retire in the process.

But you have a valid arbitration agreement that complies with the Armendariz requirements. Your valid employment arbitration agreement has a “class action waiver” and a “delegation clause.”

Employee’s attorney isn’t aware of your arbitration agreement because your employee never told them about it. However, your attorney does.

The way the tide is changing, employee’s attorney should concede arbitration. They should agree to dismiss the court case and simply arbitrate.

But employee’s attorney is stubborn. So they refuse to arbitrate and fight instead.

Your attorney files papers (a petition to compel arbitration) with the court. The papers ask the court to send the case to arbitration so the arbitrator can decide whether the agreement is enforceable. Employee’s attorney argues the arbitration agreement or the delegation clause, or both, are “unconscionable,” and, therefore, the agreement is void/voidable.

Under the delegation clause, your attorney tells the judge he/she can’t even decide whether the arbitration agreement is void/voidable. That’s because the delegation clause says only the arbitrator can decide that, not the court, so send the case to arbitrator to decide. Court should send the case to arbitration.

The court should not be allowed to question your “class action waiver” either. That is a substantive issue going to “unconscionability” of the agreement itself. The delegation clause prevents the court from even evaluating that issue because it says the arbitrator should be the one to decide, not the court.

And the arbitrator’s ruling on whether there will be class arbitration should be no, employee’s class allegations get dismissed from the arbitration. Employee may arbitrate his individual claim against your company, but cannot do so on a “class” arbitration basis. Since employee has to arbitrate his individual claim, that means it’s one-on-one against your company. And he’s not an appropriate “representative” of any court class action either even if he wanted to dismiss his private arbitration. (Read more about arbitration “class action waivers” here.)

Arbitration is once again becoming an attractive way to control employee legal risk, even for small/medium employers.