Written by Brian Koegle, Founding Partner
WHY CALIFORNIA EMPLOYERS NEED STANDALONE ARBITRATION AGREEMENTS
For California employers considering arbitration agreements with their employees, the path to enforceability is fraught with pitfalls. Unlike other states where arbitration provisions buried in employee handbooks or offer letters may suffice, California law demands a more deliberate approach: a standalone arbitration agreement that meets specific legal requirements.
The Standalone Requirement
California courts have consistently held that arbitration agreements must be clear, conspicuous, and presented in a manner that ensures employees understand what rights they are waiving. In Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, the California Supreme Court established the foundational requirements for mandatory employment arbitration agreements. While the decision didn’t explicitly require standalone agreements, subsequent case law has demonstrated that embedding arbitration provisions within broader employment documents invites challenges.
The risk of burying arbitration language in employee handbooks or offer letters is a finding of “procedural unconscionability”. Under this analysis, the courts scrutinize whether employees had a meaningful opportunity to understand and consider the arbitration provision, and whether the employer used enough effort to be transparent with the employee. In Baltazar v. Forever 21, Inc. (2016) 62 Cal.4th 1237, the California Supreme Court emphasized that California arbitration agreements presented on a “take-it-or-leave-it” basis, particularly when obscured within lengthy documents filled with legalese, may be deemed procedurally unconscionable.
A standalone arbitration agreement eliminates ambiguity. It signals to employees—and to courts—that this is a separate, important document requiring thoughtful consideration. This approach satisfies California’s heightened scrutiny of arbitration provisions and demonstrates good faith on the employer’s part.
California-Specific Drafting Requirements
California law imposes substantive requirements on arbitration agreements that exceed federal standards. Under Armendariz, enforceable employment arbitration agreements must: (1) provide for neutral arbitrators; (2) provide for more than minimal discovery; (3) require a written award; (4) provide for all types of relief that would otherwise be available in court; and (5) not require employees to pay unreasonable costs or arbitration fees.
Moreover, following Gentry v. Superior Court (2007) 42 Cal.4th 443, employers must ensure their agreements don’t prevent employees from vindicating statutory rights. While Gentry was later limited by the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333, California courts continue to carefully scrutinize arbitration agreements for unconscionability under state law principles.
Drafting must also account for California AB 51 (Labor Code § 432.6), which prohibits employers from requiring arbitration of FEHA, Labor Code, or wage order claims as a condition of employment, though arbitration agreements entered into voluntarily remain enforceable. This creates a delicate balance in presentation and consideration.
The Consideration Imperative for Current Employees
Perhaps the most critical element for California employers: current employees must receive separate consideration when signing an arbitration agreement. In Baxter v. Genworth North America Corp. (2017) 16 Cal.App.5th 713, the court held that continued employment alone is insufficient consideration for current employees who are being asked to waive their right to a jury trial – there must be something more!
This represents a fundamental departure from general at-will employment principles, because employees possess a substantive right to jury trial, asking them to waive this right requires something of value in return. Acceptable consideration might include a small financial bonus or gift, additional paid time off, enhanced benefits, or other tangible benefits beyond mere continued employment.
For prospective employees or job candidates, the job offer itself constitutes sufficient consideration. For current employees, employers must provide something more—and document it clearly in the arbitration agreement.
Conclusion
California employers who invest in properly drafted, standalone arbitration agreements supported by adequate consideration create enforceable frameworks that withstand legal challenge. This foundation is essential before realizing arbitration’s benefits, which we’ll explore in the next article: protecting your business from class action exposure.
Brian Koegle is the founding partner of Koegle Law Group, APC, a boutique litigation firm specializing in employment law counseling and litigation throughout California.
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LEGAL DISCLAIMER: This article is provided for informational purposes only and does not constitute legal advice. The information contained herein is general in nature and may not reflect current legal developments or address your specific situation. Readers should not act upon this information without seeking professional legal counsel tailored to their individual circumstances. For specific legal advice regarding employment arbitration agreements or California employment law matters, please consult with a qualified employment law attorney.