Labor & Employment Law Blog

In an April 26, 2010 decision signaling continued judicial antagonism to arbitration of employment claims, the California Supreme Court held in Pearson Dental Supplies, Inc. v. Superior Court that an arbitration decision in favor of an employer is subject to judicial review and to being vacated by a court if a legal error by the arbitrator would deprive a plaintiff employee of a hearing on the merits of a claim for alleged violation of the Fair Employment and Housing Act or, tellingly, a claim based on "other unwaivable statutory rights."

Luis Turcios was employed by Pearson Dental Supplies, Inc., as a janitor. After Pearson Dental Supplies terminated his employment, Turcios submitted to the  Department of Employment and Housing ("DFEH") a complaint alleging Pearson Dental Supplies violated the Fair Employment and Housing Act ("FEHA") by discriminating against him based on his age and related claims. After receiving from the DFEH a "right-to-sue" notice, Turcios filed suit against Pearson Dental Supplies.

Approximately five months after Turcios filed suit, Pearson Dental Supplies filed a motion to compel Turcios to arbitrate his claims based on an arbitration agreement Pearson Dental required Turcios to sign as a condition of employment. The trial court granted that motion, and the parties selected an arbitrator.

The arbitrator decided in favor of Pearson Dental Supplies, finding that Turcios' claims were time-barred by a provision of the arbitration agreement requiring Turcios to initiate arbitration of any claims arising out of his employment within one year because Turcios did not submit his claims to arbitration within one year of the date Pearson Dental Supplies terminated his employment.

Turcios then challenged the arbitrator's decision in the trial court. The trial court agreed with Turcios that the arbitrator made a legal error when the arbitrator decided that Turcios' claims were time-barred and vacated the arbitrator's decision.

Pearson Dental then sought appellate review of the trial court's decision vacating the arbitrator's decision. The Court of Appeal agreed Turcios' claims were in fact not time-barred, but the Court of Appeal agreed with Pearson Dental Supplies that the arbitrator's decision was not subject to review based on a legal error by the arbitrator and reversed the trial court's decision to vacate the arbitrator's decision.

Turcios then petitioned the California Supreme Court to review the Court of Appeal's decision. The California Supreme Court agreed with Turcios and with the trial court and held that arbitration decisions based on arbitration agreements entered into as a condition of employment are subject to a greater scope of review than other types of arbitration agreements. The Court held also that a court can vacate an arbitrator's decision if the decision is based on a legal error that effectively bar an employee from having claims for alleged violation of the FEHA or for "other unwaivable statutory rights" decided on the merits. The Court held also that the arbitrator failed to properly apply a provision of the Code of Civil Procedure providing that an arbitration filing deadline is tolled while a related civil action for the same claim(es) is pending.

In one bright spot in the decision, the Court declined to hold that a provision of the arbitration agreement arguably waiving Turcios' right to submit claims to administrative agencies, such as the DFEH, is unconscionable. The Court explained: "[A]s the United States Supreme Court recently recognized [citation], an arbitration agreement could, under federal law, [such as the Federal Arbitration Act,] validly limit the resort of an employee to an administrative agency that acts as an adjudicator, rather than as a prosecutor, of employment claims, such as the Labor Commissioner in this state."

The California Supreme Court's decision in this case is a further development in a long line of cases finding various provisions of arbitration agreements between employers and employees unenforceable or otherwise limiting the usefulness of such agreements to employers. In addition, lower appellate courts frequently address employment arbitration agreements in reported opinions. An employment arbitration agreement previously believed to be enforceable might not withstand judicial scrutiny today or in the future. Employers should therefore consider having such agreements reviewed periodically by experienced counsel.