When an employee signs an arbitration agreement, it may seem that any dispute arising from the employment relationship must be arbitrated. But the precise language of the agreement matters, and it can make the difference between having a claim heard in court and having it decided by an arbitrator.
That was demonstrated by a recent California Court of Appeal decision, Morales v. Superior Court of San Diego County, involving a longtime employee of San Diego Gas & Electric Company (SDG&E).
Morales is yet another case where the parties litigate whether their dispute must be heard in Superior Court by an arbitrator. In other words, before the matter is even heard, they must spend time and resources litigating where their dispute will be decided.
Silvia Morales had worked for SDG&E for nearly 20 years when she was terminated in September 2024. She subsequently sued in San Diego Superior Court, alleging violations of the Fair Employment and Housing Act, the California Family Rights Act, and California’s public policy protections against wrongful termination.
SDG&E responded that Morales had agreed to arbitrate her claims when she was hired in 2005.
Morales had signed an offer letter stating that her employment was “at-will.” The letter also provided that “[a]ny dispute regarding any aspect” of the agreement, or any action allegedly violating a provision of the agreement, would be submitted to arbitration.
About a week later, Morales signed a more formal nine-page employment agreement containing essentially the same arbitration language. That agreement also contained a merger clause stating that it constituted the entire agreement between the parties concerning its subject matter and merged prior discussions.
When SDG&E moved to compel arbitration, the trial court agreed with the company. It reasoned that because the agreement characterized Morales’s employment as at-will, her claims that SDG&E had violated legal exceptions to the at-will rule were disputes concerning the agreement and therefore fell within the arbitration provision.
When Morales appealed, the Court of Appeal ruled in her favor.
It concluded that the arbitration provision in her employment documents did not cover her claims for wrongful termination based on disability discrimination, failure to accommodate, retaliation, and other violations of California law. It directed the trial court to deny SDG&E’s motion to compel arbitration.
The appellate court determined that, because of its merger clause, the later, formal employment agreement controlled the scope of the arbitration provision.
The specific wording of that provision required arbitration of disputes “regarding any aspect of this Agreement” or acts allegedly violating the Agreement. That was not the same as an agreement to arbitrate every dispute arising from Morales’s employment.
California courts have recognized a range of arbitration provisions.
At one end are broad provisions covering virtually any claim “arising from,” “related to,” or having a connection with employment.
At the other end are provisions limited to disputes concerning the interpretation, performance, or violation of the employment agreement itself.
The Morales provision fell into the second category.
Morales was not claiming that SDG&E had merely breached her employment agreement, nor was she asking a court to interpret one of its provisions. Her claims instead rested on statutory protections and fundamental public policies that exist independently of the actual employment contract.
In other words, the fact that her employment was at-will did not mean that SDG&E could disregard California laws limiting an employer’s ability to terminate an employee. Those legal protections were independent of the agreement, and her wrongful termination claim was a common-law tort claim rather than a contract claim.
The court rejected the utility’s suggestion that any ambiguity should be resolved in favor of arbitration. Although California has a general policy favoring arbitration, there is no policy favoring arbitration of disputes that the parties never agreed to arbitrate. Moreover, when an employer drafts the agreement, ambiguities are construed against the employer and in favor of the employee.
This case is a reminder for employers that if an arbitration agreement is intended to encompass employment-related statutory claims, the agreement should say so clearly. As the law is constantly changing, it might behoove an employer to regularly update the wording of any arbitration clauses in its employment agreements.
And for employees, the decision is a reminder not to assume that signing an arbitration agreement necessarily means agreeing to arbitrate every employment dispute; the wording of the agreement, and the legal basis for the claim, can be decisive.
By Laurie Murphy