In the late summer of 2000, the California Supreme Court ruled that an employee can be forced to sign an arbitration agreement as a condition of employment -- even if the arbitration agreement takes away the right to a jury trial on wrongful termination and discrimination issues -- so long as certain conditions are met. But now a California federal court has ruled that when federal law such as Title VII is involved, an employer cannot force employees to arbitrate their claims. Until a federal appeals court or the U.S. Supreme Court rules on the issue, employers will have to walk a fine line if they want to require employees to agree to arbitrate discrimination and harassment actions. Employers generally want employees to agree to arbitration so that a case can be handled without a jury.

In Armendariz v. Foundation Health Psychare, the California Supreme Court held that in order to be enforcable, such an agreement must provide for a neutral arbitrator, adequate discovery, a written decision, an opportunity for limited judicial review, and limits on the costs that the employee must pay.

The Court, in an opinion by Justice Stanley Mosk, threw out the arbitration agreement in question, but the justices said that it is neither unconscionable nor contrary to California public policy to refuse to hire an employee who won't sign an arbitration agreement -- even if that means giving the right to a jury trial and some of the procedural rights that go with it.

The requirements of an enforceable arbitration agreement under Armendariz are:

1. It must preserve all remedies available in court, including punitive damages and attorney fees where applicable;
2. It must provide for a neutral arbitrator, not one selected solely by the employer;
3. It must provide for "adequate" discovery, such as that allowed under the California Arbitration Act;
4. It must provide for a written award, so that an appellate court might review the award of the arbitrator under some circumstances.  The justices declined to say what standard of review such a court would apply; and
5. The employee cannot be forced to pay any type of expense that he or she would not have to pay in court.

For example, if an arbitrator is to be paid $200 an hour, the employer must pick up the tab.  But the fact that a filing fee is higher in arbitration than at the courthouse would not invalidate the agreement.

But despite the favorable ruling from the California Supreme Court, federal law is interpreted under federal court decisions, and in the 9^th Circuit, under Duffield v. Robertson Stephens & Co., Title VII plaintiffs are entitled to their day in court, even if they sign an arbitration agreement. In fact, an employer who fires an employee for failing to sign an arbitration agreement may be liable for wrongful termination under Title VII! The EEOC has taken the position that an employer violates Title VII just for including federal claims in (or failing to exclude them from) an arbitration agreement.

To play it safe, employers should consider

• whether to insist on arbitration at all;
• whether to exclude federal claims from your arbitration agreement; or
• whether to exclude federal claims with the proviso that if it becomes lawful to include them, then the arbitration agreement will apply to them at that time.