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Second Division Deems Arbitration Agreements Unconscionable and Executed by Fraud

Securing employee's consent to arbitration agreement by means of unconscionability and fraud is not acceptable. 

In a decision recently certified for publication on October 22, 2021, the California Court of Appeals, Second Division, reviewed two versions of arbitration agreements executed between a group of employers and their employees. The decision stems from a class action lawsuit, Yeni Najarro et. al. v. Horizon Personnel Services Inc. et. al., wherein the employees filed eighteen employment related claims against their employers. The employers attempted to hide behind the different versions of arbitration agreements and compel the employees to dispute their claims before an arbitrator which would have prevented the employees from filing a lawsuit in court.

However, the Appellate Court determined that the arbitration agreements were unenforceable as the employee's consent to arbitration was secured by unconscionable terms and fraud in the execution of the agreements. This post will briefly highlight the big picture points of the Appellate Court's decision, and demonstrate how employees can overcome unfair arbitration agreements provided by their employers.

Arbitration Agreement Impact on Employees

We have written before the employers prefer arbitration for various reasons, but arbitration agreements may have a negative impact on employees and disadvantages employees after signing arbitration agreements. It is important to remember that there is an inherent imbalance of bargaining power at the time of hiring - with employers tending to hold all the power over employees. Many employers use this advantage by including arbitration clauses that deprive employees of their right to have their day in court - which was the situation in the Najarro case - and restrict employees in many other ways. The Srourian Law Firm and its attorneys have experience overcoming unfair arbitration agreements and securing employee's employment rights to have their day in court.

What makes an Arbitration Agreement Unconscionable?

In the Najarro class action lawsuit, although there was an arbitration agreement between the employers and employees which delegated power to an arbitrator to preside over and resolve disputes between employers and individual employees, the courts typically have the power to review all agreements or contracts for enforceability.

Unconscionability is one argument employees may raise to have an unfair agreement deemed unenforceable. In California, unconscionability is referred to as the absence of meaningful choice on the part of one party to a contract, and the contract terms unreasonably favor the other party involved in the contract. Unconscionability can be procedural - meaning that during the negotiation process one party may be oppressed or surprised due to having unequal bargaining power. Unconscionability can also be substantive - meaning the substance of the terms will result in overly harsh results to one party and one-sided favorable results to another party.

Applying the doctrine of unconscionability, the Second Division determined that one version of the arbitration agreement was unfair to employees, and therefore unenforceable, because the arbitration agreement (1) forced employee's to waive their right to file a class action lawsuit for employment related claims, (2) the employers did not countersign the agreement, which is required to demonstrate mutual intent to enter into an agreement, and (3) the employees were not provided a meaningful opportunity to negotiate the terms of the arbitration agreement with their employers. Here, the employees were pressured into signing arbitration agreements that took away their power to file a class action lawsuit in court. Underlying the lawsuit was the fact that the employees had difficulty understanding and speaking the English language which the court later addressed in its discussion of fraud in the execution of agreements.

What is Fraud in the Execution?

One key aspect of the Second Division's ruling in Najarro is the court's discussion of fraud in the execution of arbitration agreements and the implications it may have for employees that speak and or read English as a second, or maybe even third or fourth language. In California, a claim for fraud in the execution is not subject to arbitration where the facts can demonstrate that there was not mutual assent between employer and employee to enter into an agreement. Fraud in the execution of an agreement occurs when an employee signs an agreement but is deceived by the employer as to the nature of the agreement; and, the employee does not fully grasp the terms that he or she is agreeing to. In the event that this happens, the court will review the facts underlying the lawsuit in relation to the contract terms to determine whether or not the agreement is void or unenforceable.

In the Najarro lawsuit, the employees were not proficient at reading Spanish and English, nor were they proficient at speaking English. Additionally, the employers - taking advantage of the obvious language barrier - merely handed the arbitration agreements to the employees and referred to the agreement as being "unimportant". Moreover the employers took advantage of the employees by pressuring them to essentially "take it or leave it" when it came to accepting the offer for employment. The employers conditioned the employees employment on on whether or not the employees signed the arbitration agreement.

Basically, the employees were compelled by the employers to sign the arbitration agreement if they wanted to be employed. The employees were not given a reasonable opportunity to read the arbitration agreements or at least have an attorney interpret the agreement for them so that they could understand exactly what they were agreeing to, and what employment rights were being waived. When a situation like this happens, as was the case in Najarro, the court is likely to deem an agreement void or unenforceable because there is no clear intent or mutual assent that the disadvantaged party - here it was non-English speaking employees that also struggled to read Spanish and English - to mutually enter into an arbitration agreement waving vital employment rights.

Each case will depend on the specific facts, so it is important to consult with an experienced labor law attorney to assess the specifics of your case to determine if your employment rights are being violated by an unconscionable arbitration agreement.

Free Consultation

Srourian Law Firm, with locations in Los Angeles, Westwood, Woodland Hills, and Orange County is experienced in all aspects of employment law including arbitration agreements and filing class action lawsuits, and have aggressively represented employees in Los Angeles, Hollywood, Santa Monica, Orange, Irvine, Anaheim, Santa Ana, Newport Beach, Costa Mesa, Fullerton, Tustin, Mission Viejo, San Clemente, Garden Grove, Laguna Niguel, Brea, Fountain Valley, Aliso Viejo, Yorba Linda, Westminster, Laguna Hills, Cypress, and La Habra.

If you or someone you know suffered employment violations, you may have certain employee rights under state and federal law, and may be entitled to compensation as a part of a class action lawsuit. Please contact us to speak with one of our lawyers for a free consultation.



Dismissal Contract

FAQs on Severance Agreements: Should I sign it?

Severance agreements are legally binding contracts. Consult an attorney to protect your rights.

Learning that you are being laid off or fired from your job is stressful, to say the least. In many cases, your employer will offer you a severance package and ask you to sign a severance agreement. Before you sign any severance agreement, you should know your rights and protect yourself financially and professionally. You should also consult an attorney to ensure your severance agreement is accurate and fair.

Here are some FAQs about severance:

Q: What is a severance package?

A: A severance package refers to a payment or other benefits an employer offers an employee upon termination of employment. Generally, an employer is not required by law to offer a severance package to every employee unless there was a previous agreement included in the terms of employment. Nevertheless, many employers voluntarily offer a severance package in order to limit liability and as a way of assisting employees. Employees who are terminated for poor performance or terminated for cause are generally not entitled to severance.

Q: What is a severance agreement?

A: First and foremost, a severance agreement is a legally binding contract between you and your employer that indicates you have agreed to accept a severance package as a result of the termination of your employment. You should realize that you are agreeing to the terms of the agreement, and the agreement will be enforceable. Signing a severance agreement will usually mean that the employee agrees to give up (or waive) certain rights in exchange for the payment specified in the agreement. The most important right that an employee waives by signing a severance agreement is the right to sue the employer for any reason, such as harassment, discrimination, retaliation, wrongful termination, or violations of the California Labor Code. In other words, your employer is offering to give you a payment in exchange for a promise that you will not sue them for terminating your employment. Also, depending on the severance agreement, you may be giving up other rights as well such as a confidentiality clause that prohibits you from speaking about the termination. Because you are waiving important rights, you should always consult with an attorney before signing a severance agreement.

Q: Are severance agreements enforceable?

A: Yes. Since the severance agreement is a contract, it is legally binding and courts will generally enforce the terms of the contract. That means, for the most part, you are bound by the terms of the severance agreement. Of course, there are some employment rights that are not waiveable under a severance agreement, and even if they are included will not be enforceable. These include rights that are strictly protected under California and/or federal law such as a dispute over unpaid wages or overtime pay you may be entitled to. However, for the most part, a severance agreement is enforceable absent certain theories of contract law such as duress, fraud or unconscionability.

Q: Do I have to sign a severance agreement to receive a severance package?

A: Yes. By design, you will not receive your severance package unless you sign a severance agreement. That’s why it is important to consult an attorney so you fully understand the terms of the agreement. But before you sign a severance agreement, you are free to negotiate the terms of the severance package. Remember, a severance package is merely an offer that you are free to accept, reject or negotiate. Of course, if you do not agree to a severance package, you will not receive any severance payment or benefits.

Once you are told that your employment is being terminated, you should consult the employee handbook to see what rights and benefits you have as an employee as well as any pre-employment terms and agreements to ensure the severance package fairly reflects any prior agreements. Also, there are also certain benefits that are protected by law that you are entitled to after termination such as COBRA for health care, and ERISA for retirement benefits.

Q: Do I need an attorney?

A: Yes. In all legal matters, it is best to consult with an attorney, particularly in a stressful situation like losing your job. Even if you are caught off guard, don’t rush to accept a severance package or sign a severance agreement. You have certain rights as an employee that are protected by law, and you need an experienced labor attorney to ensure your rights are protected.

Labor law is quite complicated, and losing your job is stressful. You should consider consulting an attorney to advise you about relevant local, state and federal labor laws that are enacted to protect employees. Also, an attorney should review the severance agreement to ensure the terms are accurate and lawful. More importantly, an attorney can advocate for you during this difficult situation.


Srourian Law Firm, with locations in Los Angeles, Westwood, Woodland Hills, and Orange County is experienced in all aspects of employment law including severance agreements and have aggressively represented employees in Los Angeles, Hollywood, Santa Monica, Orange, Irvine, Anaheim, Santa Ana, Newport Beach, Costa Mesa, Fullerton, Tustin, Mission Viejo, San Clemente, Garden Grove, Laguna Niguel, Brea, Fountain Valley, Aliso Viejo, Yorba Linda, Westminster, Laguna Hills, Cypress, and La Habra.

If you or someone you know suffered employment violations as an employee or need advice regarding a severance agreement, you should be aware of the employee rights and protections under state and federal law to ensure the severance package is fair and accurate. Please contact us to speak with one of our lawyers for a free consultation.