Frequently, employment arbitration agreements are written with the intent to apply to future disputes between an employee, the employer and the employer’s parent and sister companies.
Employers and third parties can breathe easier after the California Court of Appeal held that employees who sign an arbitration agreement cannot avoid arbitration by suing related entities and arguing that arbitration does not apply because the third-parties were not signatories to the agreement. Edgar Gonzalez v. Nowhere Beverly Hills LLC, B328959 recently upheld this notion which had been put in question by another case earlier this year.
In Edgar Gonzalez v. Nowhere Beverly Hills LLC, a former employee filed a wage and hour class action lawsuit against his former employer, Nowhere, and eight other related entities based on a joint employer theory. The Plaintiff conceded that he signed an arbitration agreement and argued that the agreement did not apply to the non-signatory related entities. The trial court ordered the claims against Nowhere to arbitration but denied arbitration for the related entities on the grounds that they were not signatories to the arbitration agreement. Gonzalez then strategically dismissed Nowhere from the case to proceed against the related entities. The defendants appealed.
The Court of Appeal reversed the trial court’s order, holding that the employee’s claims based on a joint employer theory were closely related to the employment between Gonzalez and Nowhere, including the agreement to arbitrate. The Court reasoned that he could not seek to impose liability on the related entities based on a joint employer theory while simultaneously denying that a joint employment relationship did not also apply to arbitration. The Court concluded that the key factor to reaching its decision to enforce the arbitration agreement is the nexus between the claims against the non-signatories and the underlying employment agreement between the plaintiff and the actual employer, regardless of which entity expressly signed the arbitration agreement. A clear nexus existed because the plaintiff alleged a joint employer liability theory from the outset. California employers may take comfort that employment arbitration agreements should be enforced in favor of related parties arising from claims based on an employee’s employment.
To further complicate matters, new laws set to take effect in 2025 will reshape arbitration in California. SB 365 will allow cases to proceed through the trial process even where a party appeals an order denying a petition to compel arbitration. Additionally, SB 940 will permit the issuance of subpoenas to third parties during the discovery phase of arbitration, broadening the scope of all parties to obtain discovery in the arbitration space.
However, because there is a split of authority over the enforceability of arbitration agreements to related parties, the California Supreme Court will be more interested in visiting this issue. CDF will update our readers with developments as they unfold.
Employers should work with their counsel to consider utilizing arbitration agreements with their employees, and those who currently utilize arbitration agreements should revisit existing arbitration agreements to keep up with ever-changing California labor law and optimize enforceability.
