The California legislature is notoriously hostile to mandatory arbitration agreements in the employment context. That’s because the legislature believes employers have more negotiating power than employees; thus, the arbitration agreements that employers give to employees often have one-sided terms that heavily favor the employer. The employee often feels that he has little choice and must sign the agreement if he wants the job.
To remedy this perceived unfairness in bargaining power, the California legislature has enacted a series of anti-arbitration laws that apply in the employment context. One of those laws is California Code of Civil Procedure (CCP) Section 1281.97. When an employer requires its employees to sign a mandatory arbitration agreement, this law states that the employer must pay the arbitrator’s fees within 30 days of the due date. If the employer misses that deadline, the employer forfeits the right to proceed in arbitration, and the employee is free to ignore the signed arbitration agreement and proceed in court.
The Hernandez Decision
However, in Hernandez v. Sohnen Enterprises, Inc., the California Court of Appeal ruled that CCP Section 1281.97 “disfavors arbitration” because the forfeiture provision applies only to arbitration contracts, not all contracts. The Court of Appeal noted how this was inconsistent with the Federal Arbitration Act (FAA), which reflects a broad public policy in favor of arbitration and an explicit requirement that state laws must treat arbitration contracts equally to all other contracts. Therefore, because the arbitration agreement in Hernandez was explicitly governed by the FAA, the Court ruled that the FAA preempted and voided CCP Section 1281.97. As a result, the employer in Hernandez who failed to pay by the 30-day deadline no longer forfeited its right to proceed in arbitration.
What Employers Should Do Now
Employers that require employees to sign mandatory arbitration agreements should immediately review their agreements to make sure that they contain explicit language stating that they are governed by the FAA. Ensuring that the FAA controls the arbitration agreement allows an employer to use the Hernandez case in its defense if the employer ever forgets to pay its share of arbitration fees by the 30-day deadline.
With that said, however, employers should endeavor to always pay their share of the arbitration fees by the 30-day deadline imposed by CCP Section 1281.97 because at least one other Court in California (Gallo v. Wood Ranch USA, Inc. (2022) 81 Cal. App. 5th 621) has reached the opposite conclusion from the Hernandez Court and ruled that the FAA did not preempt CCP Section 1281.97). This means that it’s not a slam-dunk for an employer who misses the 30-day payment deadline, even after the Hernandez decision.