California Court Rejects Overbroad Employment Arbitration Pact

Takeaway: Employers should periodically review arbitration agreements to ensure they remain narrowly focused on employment-related disputes and impose mutual obligations on both sides. When overreaching provisions define the agreement’s core purpose, a court may refuse to enforce the entire contract.

A California Court of Appeal affirmed the denial of an employer’s motion to compel arbitration, holding that employment arbitration agreements were permeated by unconscionability and could not be saved through severance.

California law generally favors arbitration agreements, but they remain subject to ordinary contract principles. Under the state’s unconscionability doctrine, courts evaluate both procedural and substantive unconscionability on a sliding scale and may refuse enforcement when unfair provisions are sufficiently pervasive.

HR Q&A: What are the California rules regarding mandatory arbitration agreements, and how do they differ from federal law?

The plaintiff worked at two affiliated automobile dealerships and signed arbitration agreements as a condition of employment with each employer. The agreements required arbitration of nearly every conceivable dispute arising not only from employment, but also from virtually any relationship between the plaintiff, the employers, their owners, affiliated entities, employees, and other designated third parties.

After employment ended, the plaintiff filed a putative wage-and-hour class action alleging violations of California labor laws and requested a jury trial. The employers moved to compel arbitration, arguing the agreements covered the claims and that any unenforceable provisions could be severed.

The Sacramento County Superior Court denied the motion. The court concluded the agreements were both procedurally and substantively unconscionable and found that the offending provisions were too central to the agreements to permit severance. The employers appealed.

The Third District Court of Appeal affirmed.

The appellate court agreed that the agreements’ extraordinary breadth rendered them substantively unconscionable. Rather than limiting arbitration to disputes arising from the employment relationship, the agreements swept in virtually any claim connected to any relationship among the plaintiff, the employers, their affiliates, employees, officers, agents, and other designated beneficiaries. The employers failed to identify any legitimate business justification for requiring arbitration of such an expansive universe of disputes.

The court also found the agreements lacked mutuality. While the plaintiff was required to arbitrate claims involving a broad group of affiliated entities and individuals, those third parties were not subject to corresponding obligations. The court concluded the agreements imposed one-sided burdens that unfairly favored the employers without sufficient justification.

The employers argued that any problematic language could simply be severed. The court disagreed. California courts may excise isolated unlawful provisions when doing so preserves the parties’ basic agreement, but they may not rewrite contracts whose central purpose is unconscionable. Here, the overbroad scope and lack of mutuality were not minor drafting defects. They reflected the agreements’ fundamental design. Removing those provisions would require the court to create an entirely new arbitration agreement rather than enforce the one the parties executed.

In affirming the trial court, the Court of Appeal emphasized that arbitration agreements must remain fair as well as broad enough to accomplish their intended purpose. Employers seeking enforceable agreements should avoid extending arbitration obligations beyond legitimate employment disputes or drafting provisions that disproportionately benefit the employer or its affiliates.

Phan v. Knight Sacramento SU, Inc., Cal. Ct. App., Third Dist., No. C103401 (July 2, 2026).