Temporary-Worker Arbitration Agreement Did Not Follow Employee Into Direct Employment, Court Holds
When a company uses temporary workers, it may assume paperwork signed through the staffing agency will continue to protect the company after the worker becomes a direct employee. A recent California Court of Appeal decision shows why that assumption can be risky.
In Toothman v. Redwood Toxicology Laboratory, Inc., the Court of Appeal affirmed an order denying Redwood Toxicology Laboratory’s motion to compel arbitration. Redwood tried to rely on an arbitration agreement the employee signed with a temporary staffing agency before Redwood hired him directly. The court held the agreement did not apply to claims arising from the later period of direct employment with Redwood.
From Temporary Assignment to Direct Employment
Robert Toothman was hired in January 2018 by Apex Life Sciences, LLC, a temporary employment agency. As part of that employment relationship, Toothman signed an employment agreement and a companion arbitration agreement with Apex. The arbitration agreement required arbitration of disputes arising out of or related to Toothman’s employment with, or termination from, “Company.” The agreement defined “Company” as Apex Life Sciences, LLC, its affiliates, subsidiaries, and parent companies.
Apex placed Toothman at Redwood, where he worked exclusively while employed by Apex. That staffing-agency relationship ended in April 2018. Two days later, Toothman began working directly for Redwood, where he remained until June 2022. Redwood and Toothman did not sign a separate arbitration agreement when Redwood hired him directly.
After leaving Redwood, Toothman filed a class action alleging Labor Code violations. Although his original complaint alleged he had worked at Redwood beginning in January 2018, the alleged violations reached back only four years from the filing date, meaning the claims began no earlier than September 26, 2018. By then, Toothman was no longer employed by Apex and was working directly for Redwood.
Redwood’s Arbitration Argument
Redwood moved to compel arbitration and to dismiss Toothman’s class claims. It relied on the arbitration agreement Toothman had signed with Apex.
Redwood made three main arguments. First, it argued it was covered by the agreement because it qualified as an “affiliate” of Apex. Second, it argued it could enforce the agreement as a third-party beneficiary. Third, it argued Toothman was equitably estopped from avoiding arbitration because his claims were allegedly intertwined with the Apex agreement.
The trial court rejected those arguments. Redwood appealed.
The Court Refused to Stretch the Word “Affiliate”
The Court of Appeal began with a basic rule: arbitration is a matter of contract. A person generally cannot be forced to arbitrate a dispute unless they agreed to do so. That principle applies even though federal and California law favor enforcing arbitration agreements on the same footing as other contracts.
The court rejected Redwood’s argument that it was an “affiliate” of Apex. The agreement did not define that term. But the companion employment agreement did define businesses like Redwood as “Clients.” That distinction was important. Apex and Toothman knew how to refer to companies where Apex placed temporary workers, and they used the word “Clients” for that purpose. They did not include “Clients” in the arbitration agreement’s definition of “Company.”
The court also reasoned that “affiliates,” “subsidiaries,” and “parent companies” all suggest relationships involving common ownership or control. Redwood was not alleged to share ownership or control with Apex. It was a third-party business connected to Apex through an arm’s-length staffing relationship.
For that reason, the court concluded Redwood was not a party to the arbitration agreement.
The Agreement Covered Apex Employment, Not Later Redwood Employment
Redwood’s third-party beneficiary argument failed for a related reason. Even assuming Redwood could somehow qualify as a beneficiary, the agreement still did not cover the claims in Toothman’s lawsuit.
The arbitration agreement covered disputes arising out of or related to Toothman’s employment with “Company,” meaning Apex and the related entities included in the agreement. Toothman’s lawsuit challenged Redwood’s alleged conduct after he became Redwood’s direct employee. The alleged violations began months after he stopped working for Apex.
The court found no basis to treat Apex’s arbitration agreement as controlling future disputes between Redwood and its own direct employee. The court noted Redwood apparently learned of the agreement only after Apex produced it in response to a subpoena. That fact undercut Redwood’s claim the agreement was meant to govern Redwood’s direct employment relationship with Toothman.
Equitable Estoppel Did Not Apply
Redwood also argued Toothman should be equitably estopped from avoiding arbitration. Equitable estoppel can sometimes allow a nonsignatory to enforce an arbitration agreement when the plaintiff’s claims are based on, dependent on, or closely intertwined with the contract containing the arbitration clause.
The Court of Appeal held that doctrine did not apply here. Toothman’s claims were not based on the Apex arbitration agreement or the Apex employment agreement. They were based on Redwood’s alleged Labor Code violations during Toothman’s direct employment with Redwood.
Redwood pointed to Toothman’s amendment of the class definition, which excluded workers staffed by third parties while on assignment with Redwood. The court was not persuaded. It viewed the amendment as a way to define the class, not as an admission that Toothman’s own claims depended on the Apex arbitration agreement.
Practical Lessons for Employers
This decision gives employers a useful warning. If a business wants arbitration to apply after a temporary worker becomes a direct employee, it should not assume the staffing agency’s agreement will do the job. The cleaner practice is to have the employee sign a new arbitration agreement directly with the employer at the time of hire.
The decision also illustrates how courts analyze arbitration agreements as contracts. Broad policy arguments favoring arbitration will not replace the actual language of the agreement. If the agreement identifies only the staffing agency and its related corporate entities, a client business may not be able to enforce it for a later, separate employment relationship.
For employers using temporary labor, the point is straightforward: onboarding documents should match the actual employment relationship. When the relationship changes from temporary placement to direct employment, the paperwork should change with it.
Case Summary
Toothman v. Redwood Toxicology Laboratory, Inc. was filed on May 5, 2026, by the California Court of Appeal, First Appellate District, Division Four, Case No. A171567. The Court of Appeal affirmed the Sonoma County Superior Court’s order denying Redwood’s motion to compel arbitration and dismiss class claims, holding that Redwood was not a party to the Apex arbitration agreement, the agreement did not cover claims arising from Toothman’s later direct employment with Redwood, and equitable estoppel did not apply.