Velarde holds that even enforceable arbitration agreements can be void if an employee signed under certain circumstances
California employers often require their new hires and current employees to sign arbitration agreements ("agreements") as a condition of employment or continued employment. To be enforceable, these agreements require that the employer and employee mutually agree to waive their rights to have employment disputes litigated in court before a jury and, instead, submit their claims to binding arbitration.
What happens when the current or former employee declines to follow the terms of the agreement and files a civil lawsuit in court? Will the court enforce the agreement and order the parties to arbitration? It depends. As discussed below, a recent decision from the California Courts of Appeal underscores what employers should not do if they later seek to enforce these agreements in court.
In Velarde v. Monroe Operations, LLC, the California Courts of Appeal ("Court") upheld the lower court's ruling refusing to enforce an arbitration agreement signed by a new employee who was onboarding on her first day of employment. The written decision by the Velarde Court makes clear that even if an arbitration agreement is otherwise enforceable as written, the circumstances under which the employee signs the agreement can render the agreement unenforceable.
What Led to the Appeal
On her first day of work, Ms. Velarde participated in an orientation process with the company's Human Resources Manager, who presented Ms. Velarde with a stack of 31 documents. The HR Manager told Ms. Velarde that she needed to complete all the forms before she could start working. Among other documents in the packet was the company's arbitration agreement. After reviewing the agreement, Ms. Velarde declined to sign the agreement, explaining that she did not understand it, and was accordingly uncomfortable signing it. In response, the HR Manager told her "this will help us resolve any issues without having to pay lawyers." While standing near Ms. Velarde, the HR Manager told Ms. Velarde that she had to sign it, or she could not commence work. The arbitration agreement was five pages long, contained 15 sections, and referred to various federal laws and arbitration rules. Despite her claim that she did not understand the agreement, Ms. Velarde signed it.
Ms. Velarde's employment was subsequently terminated. Although she had signed the company's arbitration agreement, her attorneys filed a civil lawsuit in court, alleging claims of discrimination, retaliation, and violations of whistleblower protections. The company moved to compel arbitration, but the trial court denied the company's motion. In doing so, the trial court found that the agreement was both substantively unconscionable due to an improper provision prohibiting Ms. Velarde from seeking judicial review of any arbitration award and procedurally unconscionable because of the way the agreement was presented to her.
On appeal, the Court upheld the trial court's ruling. The Court found it very problematic that the company "pressured Velarde into agreeing to arbitration by presenting her with the agreement, alongside 30 other documents, to review and sign while its HR Manager stood and waited," rendering Ms. Velarde "little to no time to review the terms of the agreement." Additionally, the Court took issue with some of the terms of the agreement, which included references to several different federal laws and arbitration rules. In the Court's view, the references to these laws would not be understood by a lay person.
The Court explained that it was not holding that an employee must consult with an attorney before signing the agreement, but that company's HR Manager "deprived Velarde of having a meaningful opportunity to reflect and decide for herself if she wanted to speak with an attorney or conduct her own research prior to signing." As important, the Court took issue with the fact that the HR Manager misrepresented the terms and nature of the agreement by stating that it would give the company the power to resolve all disputes between it and Ms. Velarde without either party having to pay for lawyers. The Court explained that this statement was "manifestly untrue" since the agreement required the parties to resolve all disputes by before an arbitrator and further stated that all parties would bear their own attorney fees, unless otherwise ordered by the arbitrator.
The Court also emphasized the fact that it was essentially irrelevant whether the HR Manager intentionally misled Ms. Velarde or simply provided misinformation out of negligence, ignorance, or inadvertence. The Court emphasized that its focus was on the effect of the misinformation, not the intent behind it.
Next Steps for Employers To Consider in Light of Velarde
The Velarde decision provides guidance to employers regarding mistakes to avoid when it comes to presenting arbitration agreements to new employees during the onboarding/hiring process, and for current employees who are being asked to sign a new arbitration agreement. Based upon this ruling, the following are steps that California employers may want to consider:
- For new applicants, modify the company's employment application to state that any applicant who is offered and accepts employment with the company will be required to review and sign an agreement providing that the company and the employee must submit most employment-related disputes to binding arbitration and forego proceedings before a jury in court.
- If the employer uses formal offer letters, include a stand-alone copy of the arbitration agreement with the offer letter, providing the candidate with a reasonable amount of time to review it, and advising them that they are free to consult an attorney before signing it. The same is true for current employees.
- If the new hire was not provided with the arbitration agreement with an offer letter and before onboarding, avoid presenting the arbitration agreement with a packet of other documents for immediate signing (such as form I-9s, W-2), and provide it separately. In such a case, the best practice would be to give the new hire a reasonable time to review it (at least one workweek) before returning it signed.
- For new hires and/or current employees, consider encouraging the individual to ask questions if they do not understand any of the terms of the arbitration agreement. Ensure that the employer's responses are not misleading and are straightforward.
[View source.]
