California Employer Waived Right to Compel Arbitration

Even though an employee and employer entered into an agreement to arbitrate employment disputes, the employer's participation in proceedings before the California Labor Commissioner constituted a waiver of the employer's right to compel arbitration of the employee's claim against it, a California appellate court ruled.

The employee worked for the employer as a sales representative from 2009 to 2016. In June 2017, he filed a complaint against the employer with the Labor Commissioner's Office for $22,000 in commissions, plus penalties and interest.

On Aug. 31, 2017, the employer's lawyer sent a letter to the labor commissioner saying that the complaint should be dismissed because the parties signed an arbitration agreement. That agreement provided that all claims arising out of the employment relationship that could be filed in a court of law "shall be submitted to final and binding arbitration and not to any other forum."

A hearing before the labor commissioner was set for Aug. 13, 2018. The employer filed an answer to the employee's complaint that included a defense that arbitration was the proper forum, but also included nine other defenses to the claim.

On Aug. 7, 2018, the employer filed a motion with the labor commissioner to dismiss the complaint on the grounds that the employee's agreement required arbitration of his claim. Both parties appeared at the Aug. 13 hearing. The employer's motion to dismiss was denied, the hearing proceeded, and the parties presented testimony, documentary evidence and argument.

On Dec. 5, the labor commissioner issued an order setting forth its summary of the witnesses' testimony, factual findings and legal analyses. The labor commissioner awarded the employee $22,000 in commissions and an additional $5,412 in interest and penalties.

On Dec. 20, the employer filed a notice of appeal in the superior court, and a trial was scheduled for March 20, 2019. On Feb. 8, 2019, the employer filed a petition to compel arbitration, stay proceedings, vacate the labor commissioner's order and "dismiss this matter in its entirety." The employer argued that it did not waive its right to arbitration because it consistently requested that the matter be dismissed and brought through arbitration.

The trial court denied the employer's petition, finding that it waived its right to arbitration by delaying its request to the superior court until after a full hearing took place and the labor commissioner issued its order. The employer appealed.

Waiving the Right to Arbitration

California law allows a trial court to deny a petition to compel arbitration when the right to force arbitration has been waived by the petitioner.

The appellate court noted that the relevant factors establishing waiver include whether the party's actions are "inconsistent" with the right to arbitrate and whether the "litigation machinery" has been substantially invoked and the parties were well into preparation of a lawsuit before the party notified the opposing party of an intent to arbitrate.

Although participating in the litigation of an arbitrable claim does not by itself waive a party's right to later seek to arbitrate the matter, the court said, at some point continued litigation of the dispute justifies a finding of waiver.

Mere announcement of the right to compel arbitration is not enough, the court stressed. To properly invoke the right to arbitrate, a party must timely raise the defense and take affirmative steps to implement the process, the court said. The proper procedure for halting labor commissioner proceedings is to file a petition to compel arbitration and request a stay of the labor commissioner proceedings in the superior court, the court explained.

The appeals court affirmed the trial court's ruling that the employer waived its right to arbitration. When the labor commissioner did not dismiss the complaint, the employer made the decision not to file a superior court petition to compel arbitration or stay the labor commissioner proceedings, the court said.

And, even after the labor commissioner issued its order, the employer appealed from the order but did not exercise its right to immediately seek to compel arbitration and stay the superior court proceedings. It was not until Feb. 8, 2019—20 months after the employee filed his labor commissioner complaint—that the employer finally filed a superior court petition to compel arbitration. The trial court properly found this delay was not reasonable, the appeals court said.

Younan v. Fleming Distribution Co., Calif. Ct. App. No. A157038 (May 15, 2020).

Professional Pointer: As this case shows, merely insisting that an employee's complaint is subject to binding arbitration—even repeatedly—is not enough to send the case to arbitration once the employee has filed a complaint in an administrative or judicial forum. The employer must take additional affirmative steps.

Joanne Deschenaux, J.D., is a freelance writer in Annapolis, Md.