In California employment law, few cases have had a longer or more consequential afterlife than Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000). Decided more than two decades ago, Armendariz continues to define the boundaries of enforceable arbitration agreements in the employment context and remains required reading for anyone drafting, enforcing, or challenging mandatory arbitration provisions.
At its core, Armendariz addresses a fundamental tension: whether employers may require employees to arbitrate statutory employment claims as a condition of employment, and if so, under what conditions that requirement is lawful and enforceable.
The Background of the Case
The employees in Armendariz sued their employer for wrongful termination and sex discrimination under California’s Fair Employment and Housing Act (FEHA). The employer sought to compel arbitration based on a mandatory arbitration agreement imposed as a condition of employment. That agreement, however, required employees to arbitrate their claims while allowing the employer to pursue its own claims in court, limited available remedies, and imposed arbitration-related costs on the employees.
The California Supreme Court granted review to determine whether such an agreement could be enforced when it covered unwaivable statutory rights created to protect employees from discrimination.
Arbitration of Statutory Employment Claims Is Permitted — But Not at Any Price
The Court began by confirming an important baseline principle: arbitration is not inherently inconsistent with the enforcement of statutory employment rights. Employees may be required to arbitrate claims arising under statutes like FEHA, provided arbitration serves as a fair and adequate substitute for a judicial forum.
However, the Court made equally clear that arbitration agreements cannot be used to undermine the substantive protections of those statutes. An agreement that effectively strips employees of statutory rights, remedies, or procedural protections will not be enforced.
The Five Minimum Requirements for Enforceable Employment Arbitration
Armendariz is most famous for articulating five minimum requirements that must be satisfied before a mandatory employment arbitration agreement covering statutory claims will be enforced in California.
First, the agreement must provide for a neutral arbitrator, ensuring the decision-maker is impartial and not aligned with either party.
Second, the agreement must allow for more than minimal discovery, sufficient to permit the employee to vindicate statutory rights. While arbitration may streamline discovery compared to litigation, discovery cannot be so limited that it prevents proof of discrimination or retaliation.
Third, the agreement must require a written arbitration award that includes findings and conclusions. This requirement ensures transparency, facilitates meaningful judicial review, and guards against arbitrary decision-making.
Fourth, the agreement must allow the arbitrator to award all remedies that would be available in court, including statutory damages, penalties, injunctive relief, and attorney’s fees where authorized by statute. Employers may not use arbitration to cap damages or eliminate statutory remedies.
Fifth, and critically, the agreement must not require the employee to bear costs unique to arbitration that the employee would not incur in court. The Court held that when an employer imposes mandatory arbitration as a condition of employment, the employer must bear arbitration-specific costs, such as arbitrator fees.
These requirements are not optional. An agreement that fails to satisfy any one of them risks being found unconscionable and unenforceable.
Unconscionability and the Problem of One-Sided Arbitration Agreements
In addition to articulating substantive safeguards, Armendariz reaffirmed California’s unconscionability doctrine. The Court explained that arbitration agreements imposed as a condition of employment are often contracts of adhesion, which can satisfy the procedural unconscionability requirement. Substantive unconscionability arises when the terms are overly harsh, one-sided, or unfairly favor the employer.
The agreement at issue in Armendariz was particularly problematic because it required employees to arbitrate their claims while allowing the employer to pursue its own claims in court. The Court described this lack of mutuality as “so one-sided as to be unconscionable,” absent a legitimate business justification.
This principle that arbitration agreements must be reasonably mutual continues to invalidate employer-drafted agreements that carve out employer claims while restricting employee remedies.
Why Armendariz Still Governs Today
Despite extensive federal preemption litigation under the Federal Arbitration Act (FAA), Armendariz remains good law. Courts have consistently held that its core requirements regulate how arbitration agreements are structured, not whether arbitration is allowed, and therefore do not conflict with federal law.
As a result, Armendariz continues to shape arbitration agreements in California. Employers drafting arbitration agreements must comply with its mandates. Employees challenging arbitration agreements often rely on Armendariz, and later cases applying its principles in new ways, to demonstrate procedural or substantive unconscionability, lack of mutuality, inadequacy of process, or unlawful cost-shifting.
Even recent U.S. Supreme Court decisions favoring arbitration have not displaced Armendariz’s central holding that arbitration must preserve substantive statutory rights.
Practical Takeaways for Employers and Employees
For employers, Armendariz serves as a cautionary guide. Arbitration agreements must be carefully drafted to ensure neutrality, mutuality, full remedies, adequate discovery, and employer-paid arbitration costs. Agreements that ignore these principles remain vulnerable to challenge.
For employees, Armendariz provides a framework for evaluating whether an arbitration agreement is enforceable. The presence of one-sided provisions, limits on remedies, or cost-shifting clauses may render an agreement unenforceable.