It is common today for employers to ask employees to sign agreements to arbitrate any future disputes about work-related issues, because arbitration is often faster, less expensive and more private than litigating such disputes in a court.

But if arbitration agreements are too one-sided, complex, or unfairly tilted in the employer’s favor, judges may declare them unenforceable. That was the outcome of a case recently decided by the California Court of Appeal (Beco v Fast Auto Loans).

In 2014, Bernell Beco was hired as a salesman, at $13.50 an hour, by an affiliate of Fast Auto Loans that made payday loans to consumers. Two years later he moved to Fast Auto, as a branch manager. In March of 2016, Fast Auto required all its employees to sign a four-page arbitration agreement as a condition of employment.

The document said the employee agreed that “any controversy or claim arising out of or relating to [their] employment” by Fast Auto would be submitted first to nonbinding mediation and then, if necessary, to binding arbitration.

However, the provisions of that agreement were later viewed with skepticism by the Superior Court of Orange County and the Court of Appeal. Among their concerns:

The document said any arbitration would be administered under the rules of the American Arbitration Association, or AAA, but it did not provide a copy of those rules or explain where to obtain them.

It required employees to lodge a claim within three months of the time they “first knew or should have known” of the issue in dispute, rather than the full year allowed under state law.

If an employee initiated the arbitration, he or she had to pay the first $100 of the filing fee. Fast Auto would pay for the first day of arbitration, but all costs after that would be paid by the losing party unless the arbitrator decided this would cause undue hardship to an employee, in which case the arbitrator could assess all such costs against Fast Auto.

Even then, however, the agreement required an employee to cover his or her attorney and expert witness fees and other expenses.

Parties to a dispute typically have the right of “discovery,” to require the opposing party to produce documents and information. The Fast Auto arbitration agreement said the arbitrator would decide whether to allow an employee to engage in discovery.

In May of 2016, after being employed for a year and a half, Beco logged into the employee portal of the Fast Auto website to electronically sign the agreement.

 “I was required to acknowledge a bunch of complex legal documents in order to continue my employment.” He testified. “I felt pressured to sign the documents because I was told that I had to acknowledge the documents in order to continue my employment.”

No one explained to Beco what an arbitration agreement was, he said, and he was only “given a few minutes to quickly acknowledge a multitude of documents without any time for questions or a reasonable time to review them.”

Beco was terminated on October 11, 2018. A year later he sued Fast Auto in Orange County Superior Court.

In March of 2020, Fast Auto asked the trial court to compel arbitration of the dispute. The court declined, ruling that the arbitration agreement was “permeated by unconscionability.” The flaws in the agreement were so pervasive, the judge ruled, that they could not be remedied by ignoring some problematic clauses.

Fast Auto appealed, arguing that the issues considered by the trial court should instead have been left to the arbitrator to decide under the rules of the AAA referenced in the agreement. But the company got an equally chilly response from the Court of Appeal.

The terms of an employment agreement must be “clear and unmistakable,” the appellate justices said. A reference to AAA rules does not alert an employee that he or she is giving up the right to decide if an arbitration agreement is enforceable.

The trial court was correct in determining that agreement itself was “unconscionable,” the justices said. They noted that in the landmark Armendariz v. Foundation Heath case decided in 2000, the California Supreme Court defined the standard for unconscionability in arbitration agreements and the circumstances in which such agreements may be rendered unenforceable.

Beco did not have a meaningful choice in deciding whether to sign it, the justices said, since he was told he would be terminated if he refused. Nor was it clear that he was given a reasonable amount of time to review its terms or to obtain legal advice before deciding whether to sign.

The agreement was also unfairly weighted in favor of Fast Auto, they said.

Employees faced the prospect of having to bear the significant costs of arbitration if they lost. Their deadline to file a complaint was only 90 days, not the year provided by law. They had to pay their own attorney, expert witness, and other costs even if they won. And an arbitrator might prevent them from using discovery to gather documents and facts to support their claim.

The justices affirmed the trial court's decision, remanding the case for additional proceedings. They awarded Beco his costs on appeal.

By Laurie Murphy