Forswear boilerplate in employment arbitration agreements

Arbitration agreements with employees are created to ensure that employment disputes are resolved outside of court. So it's ironic that arbitration agreement enforceability is one of the most litigated issues today.

While boilerplate language is often viewed as time-honored, every word matters. Case law is ripe with examples of the consequences of the blind use of boilerplate provisions in employment arbitration agreements. A quick look at a trio of California cases may persuade you that arbitration agreements are too important for drafting shortcuts.

Severability vs Nonseverability?

Like other contracts, arbitration agreements often have either a severability or a nonseverability clause. There are consequences to such clauses as the decision in Securitas Sec. Servs. USA, Inc. v. Superior Ct., 234 Cal. App. 4th 1109 (2015), illustrates. There, the choice and phrasing of the nonseverability clause proved fatal to the entire agreement.

Edwards, a Securitas employee, had brought suit alleging wage and hour claims under California's Labor Code against Securitas, including class action allegations and a representative claim for civil penalties under California's Private Attorneys General Act. Securitas moved to compel arbitration arguing that its employee should be required to arbitrate her individual claims, and any class or PAGA allegations be dismissed, severed or stayed.

The employee took the position that her arbitration agreement's PAGA waiver was unenforceable and that the PAGA waiver could not be severed under the terms of the agreement, making the entirety of the agreement illegal and unenforceable. The operative provisions on nonseverability were as follows:

In paragraph 4: "[T]here will be no right or authority for any dispute to be brought, heard or arbitrated as a class, collective or representative action ('Class Action Waiver'). Notwithstanding any other clause in this Agreement, the preceding sentence shall not be severable from this Agreement in any case in which the dispute to be arbitrated is brought as a class, collective or representative action."

And in paragraph 10: "In the event any portion of this Agreement is deemed unenforceable, the remainder of this Agreement will be enforceable. If the Class Action Waiver is deemed to be unenforceable, [Securitas] and [Edwards] agree that this Agreement is otherwise silent as to any party's ability to bring a class, collective or representative action in arbitration."

The trial court granted Securitas' motion in full, sending all of the claims, including the PAGA claim, to be resolved by an arbitrator. The Court of Appeal reversed, holding that the PAGA waiver was unenforceable because PAGA claims cannot be arbitrated and, by this agreement's own terms, could not be severed: "paragraph No. 4 unambiguously reflects the parties' intent that where a dispute is subject to the arbitration agreement [and is alleged as a representative claim], the provision waiving such claims, even if later determined to be illegal or unenforceable, cannot be severed from the remainder of the agreement. This is so '[n]otwithstanding any other clause in the agreement,' including the severance clause of paragraph No. 10."

Securitas illustrates the dangers of boilerplate protections. In attempting to avoid the risk of arbitration being ordered on a class-wide basis, the agreement included a nonseverability provision that engendered a worse risk: no arbitration at all. To the extent that paragraph 10 was intended to avoid that result, it was too opaque.

What might be done today to avoid this result? Drafters must craft their arbitration agreements in a manner which gives effect to the unequivocal intent to arbitrate disputes, notwithstanding unforeseen changes in the law which may later invalidate other terms in the agreement. The following is one such example: "Employee and Employer, to the extent permitted by law, commit to arbitrating all claims arising out of or relating to Employee's employment with Employer. If a court bars any specific claim from being arbitrated, this Agreement nonetheless remains in full force and effect as to all other claims."

The importance of drafting with precision and clarity cannot be understated.

Is Precision Important?

Poets and novelists bemoan the risk of inept translations. Mark Twain back-translated the French version of his "The Celebrated Jumping Frog of Calaveras County" into English to show exactly how distorting translations can be. Twain's lament is also the lament of drafters of bilingual arbitration agreements.

In Juarez v. Wash Depot Holdings, Inc., 24 Cal. App. 5th 1197 (2018), the Court of Appeal refused to compel arbitration where an employer issued inconsistent English and Spanish versions of an arbitration agreement. Worse, the inconsistency was the key issue of severability.

The employee had signed two separate employee handbook acknowledgements, one indicating that he received an English copy of the handbook and agreed to its terms and one indicating that he received a Spanish copy of the handbook and agreed to its terms. Regrettably, the English and the Spanish versions of the handbook differed in a material respect.

In the English version of the handbook, the PAGA waiver was expressly severable if it was found to be unenforceable. Under the Spanish version, on the other hand, the PAGA waiver was expressly not severable from the remainder of the arbitration agreement. The difference between the two versions was critical.

Under the English version, the unenforceable PAGA waiver could be severed and the remainder enforced. Under the Spanish version, the complete opposite were true -- the agreement prohibited severance of the PAGA waiver and rendered the entire agreement unenforceable.

The employer argued that the English version of the handbook controlled because it explicitly stated that if there was any ambiguity, the English version would govern. But, relying upon the canon of contract construction that ambiguities should be interpreted against the drafter, the appellate court held that the entire arbitration agreement was unenforceable.

Mark Twain had it down pat: "The difference between the almost right word and the right word is the difference between lightning and a lightning bug." Juarez is a stark reminder of just how right Twain remains. Drafters must consider the effects of word choice and then confirm that bilingual versions match in their use of both "lightning" and "lightning bug."

Is Context Important?

Employers often insert arbitration commitments into existing employment documents. That is perfectly permissible but raises additional concerns: The context of that placement may interject potential problems that impact the enforceability of the arbitration commitment.

Esparza v. Sand & Sea, Inc., 2 Cal. App. 5th 781 (2016), involved an issue arising from the placement of the arbitration commitment in an employee handbook, which stated, "[T]his handbook is not intended to be a contract ... nor is it intended to otherwise create any legally enforceable obligations on the part of the company or its employees."

Language designed to avoid making every page of the handbook into a contractual commitment boomeranged. The appellate court upheld the trial court's denial of arbitration because that disclaimer necessarily meant that the arbitration commitment in that handbook was also "not intended to be a contract."

Although the employee had signed the handbook acknowledgement form mentioning the arbitration agreement contained in the handbook, that acknowledgment form did not state that the employee agreed to the arbitration. Thus, there was no basis to find that the acknowledgment separately created a binding contractual commitment to arbitrate.

Here again, there was an imperfection in drafting. The boilerplate disclaimer of at will employment accidentally swept up the desired arbitration agreement. Esparza provides yet another sobering reminder of the phobia of all who draft legal documents: if you draft in haste, you will repent at leisure.