Arb Agreement in Employee Handbook Prevails

Serafin v. Balco Props. Ltd., No. A141358 (D1d4 Mar. 16, 2015)

After an employee lost on the merits in an arbitration, she challenges the enforceability of an arbitration agreement contained in her employer’s employee handbook.  The court here affirms.

Although a handful of earlier cases have found that there was no agreement to arbitrate based on arbitration policy buried in an employee handbook—particularly when the handbook disclaims the creation of any binding contractual rights—that was not the case here. To the contrary, the arbitration policy was contained in a separate document labeled MANDATORY ARBITRATION POLICY, which was explained to and signed by the employee. 

Moreover, the fact that the handbook stated that the employer’s practices were subject to unilateral change did not render the agreement illusory. Following prior cases, because the arbitration policy is subject to the covenant and good faith and fair dealing, it could not be unilaterally changed by the employer. That saved the agreement from being illusory.

Finally, the agreement wasn’t so unconscionable as to be unenforceable. The general hallmark of procedural unconscionability present in most employment cases—the fact that the agreement is adhesive and not subject to negotiation—is present here. But particularly given that the arbitration policy was explained to plaintiff, the procedural unconscionability was mild. The court also finds a general lack of substantive unconscionability except for one issue.

It issue is that the agreement allocates attorneys’ fees in a manner inconsistent with substantive employment law by permitting an award to a prevailing defendant without proof that the case was frivolous, unreasonable, without foundation, or brought in bad faith. The case law is pretty clear that an employment agreement can’t do that. But the trial court had already reached that conclusion and severed that provision from the agreement before sending the case to arbitration. Since courts refuse to sever only when an agreement is “permeated with” unconscionability—generally when there are multiple unconscionable terms—the trial court’s severance was the correct way to go.

Affirmed.