Employers: How You Present an Arbitration Agreement Is Just as Important as What the Agreement Says

Employers in California often present new employees with an arbitration agreement, usually at onboarding. Employers often — or at least they should — take great care when drafting arbitration agreements to ensure they comply with ever-changing state and federal standards.

But even the most buttoned-up, legally-defensible arbitration agreement can fail on a motion to compel arbitration if there were material flaws in how that agreement was presented to the plaintiff-employee.

The California Court of Appeal’s recent decision in Velarde v. Monroe Operations, LLC, illustrates this risk.

The Facts

Plaintiff Karla Velarde was employed as a care coordinator at Newport Healthcare. During orientation on her first day of work, the HR manager presented her with a “stack of [31] documents and told [her she] was required to complete the forms before [she] could start working.” The HR manager then told her, “we gotta get through [these to] get you onboard. We’ll try to get through them as fast as possible.” One of the documents in the stack was an arbitration agreement, which Velarde refused to sign because she “did not understand what it was.” The HR manager told her, “if there are ever any issues, [the arbitration agreement] will allow us to resolve them for you.” After asking if she needed to sign the agreement to start working, the HR manager told her, “Yes. This will help us resolve any issues without having to pay lawyers.” Velarde signed it because she “knew that [she] had to sign it to begin working.”

After the termination of her employment, Velarde filed a complaint in superior court alleging multiple claims. Newport Healthcare filed a motion to compel arbitration which Velarde opposed.

The trial court denied Newport Healthcare’s motion, finding that Newport Healthcare had pressured Velarde to sign the arbitration agreement, and that the agreement unlawfully prohibited Velarde from seeking judicial review of an arbitration award. Newport Healthcare appealed.

The Decision

The court of appeals affirmed.

It concluded that there was ample evidence of procedural unconscionability because Velarde’s execution of the document was not the product of a “voluntary or informed agreement to its terms,” and that there was substantive unconscionability because the agreement did not conform to Velarde’s expectations.

The court found there was evidence of procedural unconscionability because the contract was adhesive, and Velarde did not have meaningful time to review the terms of the agreement or consult an attorney before signing. Newport Healthcare presented Velarde with the agreement and said she had to sign it, even though she did not want to, or she could not begin working. Then, Newport Healthcare pressured Velarde into signing the arbitration agreement by presenting her the agreement along with 30 other documents, to review and sign, while its HR manager stood and waited. Most problematically, Newport Healthcare also misrepresented the terms and nature of the agreement to Velarde. When Velarde told the HR manager she did not understand the meaning of the agreement, the HR manager falsely informed Velarde that “the agreement would give Newport Healthcare the power to resolve all disputes between it and Velarde without either party having to pay for lawyers.”

(As an aside, the court noted that it was not suggesting the HR manager intentionally misled Velarde, but rather was focusing on the effect of the misrepresentation.)

The court also found aspects of the agreement to be substantively unconscionable because Newport Healthcare had “expressly misled Velarde as to the nature and the terms of the agreement.” The terms of the agreement placed Velarde in a disadvantageous position because it is unlikely a lay person would be able to navigate the Federal Rules of Civil Procedure or Federal Rules of Evidence for arbitration processes, and if she had hired a lawyer, she would be responsible for paying their fees. Of note, the court acknowledged, “we have no doubt the same ‘contract terms might pass muster under less coercive circumstances . . . .’” The agreement became unconscionable when Newport Healthcare told Velarde she would not need an attorney nor have to pay for one, when that specifically and directly contradicted the written terms of the agreement. Velarde thought she was agreeing to an inexpensive, speedy and informal resolution of her claims, but that was not the case.

The court noted that had Newport Healthcare “either correctly explained the terms of the agreement, or had not explained them at all, and had given Velarde a reasonable opportunity to review the agreement and to consult counsel, ‘this would be a different case.’”

What Employers Should Know

It is important for employers to keep in mind that the presentation of an arbitration agreement matters. In Velarde, the court found issue with the fact that the arbitration agreement was handed to Velarde as part of (read: buried in) a large stack of papers, that Velarde was pressured to sign the agreement (and all the other onboarding documents) immediately, that Velarde was not given sufficient time to review and process the agreement, and that Velarde was misled about what the agreement meant when she asked. All of these problems are avoidable with thoughtful planning and training.

Employers should think through carefully how they are presenting arbitration agreements to their employees and avoid circumstances that could be viewed as coercive. They should consider training and education for anyone that will be providing or answering questions about the arbitration agreement to avoid any misrepresentations or inadvertent coercion. In short, employers need to make sure they are not unknowingly or inadvertently invalidating an otherwise enforceable arbitration agreement.

Disclaimer: Please contact your Payne & Fears attorney for current guidance on the subject matter of this article.

*A special thank you to Summer Associate Alice Liu for her assistance on this client alert.