Court Of Appeal Holds Arbitration Agreement Covering Independent Contractors To The Same Standards Applied To Arbitration Agreements Covering Employees

In Karena Wherry v. Award, Inc., Division Three of the Fourth Appellate District of the California Court of appeal held that the standards applicable to arbitration agreements between an employee and an employer apply also to arbitration agreements between an independent contractor and the contracting “employer.” 

The plaintiffs entered into an Independent Contractor Agreement with Award, Inc., to perform real estate sales. That Independent Contractor Agreement required, among other things, that disputes arising out of the Independent Contractor Agreement be resolved by binding arbitration by the California Association of REALTORS (“CAR”) and incorporated by reference the Bylaws of CAR.

After the relationship between plaintiffs and Award, Inc., terminated approximately one year later, plaintiffs filed suit alleging Award, Inc., and other co-defendants engaged in gender discrimination, sexual harassment, and retaliation in violation of the California Fair Employment Housing Act (“FEHA”).

The trial court granted the defendants’ petition to compel the plaintiffs to arbitrate their claims. The plaintiffs then filed with the Court of Appeal a petition for writ of mandate requiring the trial court to vacate its order compelling arbitration.

The Court of Appeal granted that petition, holding that the arbitration provisions of the Independent Contractor Agreement were procedurally and substantively “unconscionable” and therefore unenforceable. The Court of Appeal concluded the arbitration provisions of the Independent Contractor Agreement were procedurally unconscionable because the Independent Contractor Agreement was presented on a “take it or leave it basis” (as many contracts are), and the plaintiffs were reportedly not provided an opportunity to ask questions or to have it reviewed by counsel. The Court of Appeal held also that the arbitration provisions of the Independent Contractor Agreement were substantively unconscionable because some of those terms were inconsistent with the requirements the California Supreme Court held in Armendariz v. Foundation Health Psychcare Services, Inc., must be satisfied before a claim for alleged violation of the FEHA by an employer can be made subject to an employment arbitration agreement.

Without any analysis or explanation, the Court of Appeal states “[t]hat plaintiffs are independent contractors and not employees makes no difference in this context. The contract by which they were to work for defendants contained a mandatory arbitration provision.” We believe this represents a remarkable expansion of the jurisprudence heretofore applicable only to arbitration agreements between employees and employers and, potentially, a remarkable expansion of the FEHA and its jurisprudence to independent contractors.

The Court of Appeal’s decision in this case presents two important take-aways:

First, businesses should consider consulting competent counsel to determine whether an arbitration agreement covering independent contractors would be enforceable under the Court of Appeal’s decision in this case. 

Second, businesses with arbitration agreements, whether applicable to employees or to independent contractors or both, should bear in mind the risks associated with incorporating by reference arbitration provisions or arbitration procedures published by some other person or entity and not presume that such arbitration provisions incorporated by reference will necessarily withstand scrutiny by California courts. In this case, the arbitration provisions the Court of Appeal found offending were contained in the Bylaws of CAR incorporated by reference into the Independent Contractor Agreement between the plaintiffs and Award, Inc.

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