Notice to Employers Regarding Supreme Court Decision on Enforceability of Written Employment Contracts

William L. Porter Founder & President Specializing in Construction Law, Business Law and Labor Law
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If you are an employer in the State of California and use a written contract of employment to define the terms of employment with your employees, there is a good chance that, as a result of a decision of the California State Supreme Court, the contract you are currently using with your employees will not be enforced by the Courts of this state. It may therefore be necessary for you to consider revising your employment contract.

In the year 2000, the California State Supreme Court issued a landmark decision in the case of Armendariz v. Foundation Health Psychcare Services, Inc. This case sets forth important guidelines to determine whether or not written employment contracts containing arbitration provisions will be enforced by the courts of this state. If employment contracts meet the requirements of the Armendariz case, there is a good chance these contracts will be enforced by the Court. If such contracts do not meet these requirements, there is a good chance that the Court will deny enforcement of the contract either in part or in whole.

Among the minimum standards set by the court for enforcement of employment contracts containing arbitration provisions are the following:

1. There must be sufficient assurances that the arbitrator will be a neutral decision maker;
2. There must be an adequate opportunity for discovery of documents and other information;
3. There must be a written decision that will reveal the essential findings and conclusions on which the arbitration decision is based;
4. The employment contract cannot deny employees the remedies available under certain statutory provisions, including for example, the attorney fees and punitive damages available under state laws prohibiting racial and sexual discrimination;
5. When arbitration is required, the employment contract cannot impose on the employee any of the costs of the arbitrator or the arbitration forum when arbitrating certain employee claims.

The Court also applied to employment contracts the general principles of contract law which might also make employment contracts otherwise unenforceable, including potential unconscionability of the contract in consideration of a balancing of such factors as the relative bargaining strength of the parties, the opportunity to negotiate, the severability of any offending provision and a consideration of the general fairness of the particular contract in question.

If you are an employer currently using any written contract of employment with your employees, you should have your contract reviewed by your attorney to determine whether the contract meets at least the minimum standards set forth by the Court. Without such a review, you may not know your contract is unenforceable until you find yourself in a dispute with an employee.

William L. Porter is a principal in Porter Law Group, Inc. in Sacramento, California.
He can be reached  at (916) 381-7868.

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