Center Convinces Court to Publish Decision Making Clear That Unfair Arbitration Agreements in Employment Contracts Will Not Be Enforced

December 15, 2022

Think that extremely one-sided arbitration agreements in employment contracts are enforceable? Think again. The Second District Court of Appeal granted the Center’s request to publish the opinion in Beco v. Fast Auto Loans, Inc. (2022) 86 Cal.App.5th 292, which makes clear that arbitration provisions that severely disadvantage employees will not be upheld in California courts. The opinion also reinforces the heightened standards for delegating the validity of such agreements to an arbitrator — particularly in employment contracts, where workers are often required to consent to arbitration or lose out on a job.

Bernell Beco, like many employees, had signed an arbitration agreement with his employer, Fast Auto Loans — with no time to read and no choice but to sign. After being fired, Beco sued Fast Auto Loans for violating the Fair Housing and Employment Act. The company filed a motion to compel arbitration based on the agreement that Beco had signed. The superior court, however, found the agreement unconscionable and denied the motion.

Before examining the contents of the agreement, the Court of Appeal determined that it was the court — not the arbitrator — who should decide the arbitrability of the case. The company had argued that since the agreement had a delegation clause, the arbitrability of the dispute should be determined by the arbitrator. However, the court explained that employers seeking to compel arbitration with their employees must meet a heightened standard: the parties must have “clearly and unmistakably” agreed to delegate the responsibility to the arbitrator. Here, the agreement’s language was too ambiguous and imprecise to meet that burden. The company further argued that the agreement’s incorporation of the AAA rules should militate in favor of delegation. But the court emphasized that, in the employment context, the fact that an agreement incorporates the AAA rules is insufficient to meet the “clear and unmistakable” test. That was especially true here, where the employee was not even given an opportunity to review the agreement or any of the AAA rules.

Next, the Court of Appeal examined the particular terms of the agreement, which were so one-sided that the court deemed them unconscionable. The arbitration provision contained many terms that significantly disadvantaged the employee: he had to pay for arbitration after one day, his time to bring a claim was reduced from the statutory one year to three months, he was not guaranteed any discovery, and he could not recover attorneys’ fees. Those provisions were so unfair to the employee that the court held that the entire arbitration agreement should not be enforced. 

Employees are frequently faced with a choice: agree to arbitrate possible claims or lose their job. A recent analysis of many of the largest consumer companies’ arbitration agreements found that they frequently include terms, beyond requiring arbitration, that make it harder for consumers to seek justice. Corporations continue to develop new, inequitable terms. Some agreements shorten the statute of limitations, or prohibit punitive damages, or limit mass arbitration to only 10 cases at a time — meaning that some consumers would have to wait hundreds of years before being heard. Others state that individuals and their counsel must meet and confer with the business before filing, and specify that multiple individuals cannot participate in the same pre-filing conference. Additionally, some companies try to back out of arbitration part-way, allowing the company to move claims from arbitration to small claims court unilaterally. 

Publication of this decision helps to clarify that deeply biased arbitration agreements in employment contracts won’t fly in California. Employees — and consumers — must be able to make a conscious choice about whether to give up their day in court, and must not be forced to enter agreements that severely harm their interests.

The Center’s letter was joined by a distinguished group of consumer and employment advocacy organizations: Consumer Federation of California, Housing and Economic Rights Advocates, Katharine & George Alexander Community Law Center at Santa Clara Law, Legal Aid at Work, and National Consumer Law Center.