What if a California employer changes its policies to include mandatory arbitration? And what if an employee signs nothing agreeing to arbitration, and even objects to arbitration orally and in writing?

Is arbitration enforceable under those circumstances? 

Once in a while a California court concludes that employers have the ability to structure the terms and conditions of employment in reasonable ways that are not necessarily evil or suspicious. A recent decision from the California Court of Appeal is just such a welcome example for employers.

The question in Diaz v. Sohnen Enterprises was whether an employer could require its “at-will” employees to be bound by a new dispute resolution program simply by remaining employed after being told that the program was a mandatory condition of employment.

A panel of the court ruled 2-1 that Erika Diaz would have to arbitrate her discrimination suit against Sohnen because she had agreed to arbitration by continuing to work. This was so even though she had never signed up for the arbitration program, and had even expressly objected to it.

The panel majority concluded that Sohnen was within its rights to enforce arbitration. According to the majority, 

California law in this area is settled: when an employee continues his or her employment after notification that an agreement to arbitration is a condition of continued employment, that employee has impliedly consented to the arbitration agreement.

At an employee meeting, a Sohnen executive introduced an alternative dispute resolution program that included arbitration. The executive told the employees that continuing to work would be considered acceptance of the terms of the program, regardless of whether the employees signed an agreement. Ms. Diaz and others refused to sign the arbitration agreement, and Ms. Diaz told management that she didn’t want to accept the terms. About that same time, her attorney filed a discrimination lawsuit against Sohnen and sent the company a letter saying that Ms. Diaz wanted to continue working but would not agree to arbitration.

Because Ms. Diaz was an at-will employee, the panel majority noted that Sohnen was free to change the terms of her employment as long as it notified her of the changes. Further, the majority concluded that Diaz had failed to establish that the arbitration pact could not be enforced, noting there was no evidence “of surprise [or] of sharp practices demonstrating substantive unconscionability.”

The dissenting judge argued that the courts should be the ones to determine whether an implied agreement to arbitrate workplace claims exists. Instead, he said, the majority put that authority in the hands of employers.

The majority decision helps to clarify the principle of “acceptance by conduct” under California law as applied to arbitration agreements in the employment setting. Indeed, it stands for the proposition that continued employment can override even an employee’s express rejection. The majority’s reasoning could apply to other forms of employment agreements, provided that the employer clearly says that acceptance is a condition of continued employment.

Tips for employers

• The majority emphasized that the affected employees were “at-will” employees, for whom the employer had the freedom to change the terms of employment with notice. Thus, it appears that the court’s reasoning would not apply to employees who are covered by collective bargaining agreements or who otherwise are not at will. Establishing “at-will” status is thus critical. 

• In the at-will context, an agreement is not unenforceable just because it was offered on a “take it or leave it” basis. There would have to be a showing that it was substantively unconscionable (unfair, oppressive, harsh, or one-sided). That said, California courts are often hostile to mandatory arbitration and will be on the lookout for evidence of unfairness.

• Employers who wish to impose arbitration should be prepared to show that they gave employees adequate notice and that the program is generally fair. A dispute resolution program requiring arbitration must also meet the requirements established by the California Supreme Court in Armendariz v. Foundation Health Psychcare Services, Inc. 

• Finally, and as already noted, it was significant that Sohnen had clearly stated to employees that their continued employment constituted their acceptance of the new arbitration provision. The explanation at the employee meeting was provided in both English and Spanish (significant, depending on the demographics of the workforce). In addition, the employees were given copies of the agreement to review at home.

California employers seeking to establish an enforceable arbitration program would be wise to consider the valuable roadmap provided by the Diaz decision.