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California First Appellate District’s recent decision in Subcontracting Concepts, LLC v. DeMelo, A152205 (April 10, 2019) applies well-established unconscionability principles to an arbitration agreement signed by an employee of an independent contractor.

The employee, DeMelo, was hired directly by Express Messenger Systems, Inc. (d/b/a OnTrac), which contracted with Subcontracting Concepts, LLC (SC).  At the start of his eCamployment, DeMelo was required to sign SC’s “Owner/Operator Agreement,” a five-page, 27-paragraph agreement with an arbitration clause in paragraph 26.  Two and one-half years later, DeMelo filed a wage claim with the California Labor Commissioner. The two corporate entities and several individually-named supervisors petitioned to compel arbitration and stay the Labor Commissioner proceeding.  The San Francisco Superior Court denied the petition, finding the arbitration agreement to be unconscionable. The First Appellate District agreed, and certified this case for publication.

The doctrine of unconscionability refers to an absence of meaningful choice with respect to the terms of a contract, usually the result of unequal bargaining power between the parties. The California Supreme Court created the legal framework for the unconscionability analysis in its 2000 decision, Armendariz v. Foundation Health Psychare Services, Inc.  In deciding whether an employee arbitration agreement is enforceable, courts in California scrutinize agreements for both procedural and substantive unconscionability, using a sliding scale that examines the degree of each type of unconscionability in relation to the other.

To assess procedural unconscionability, courts examine the circumstances under which the agreement was signed – whether it was, in essence, forced on the party with less bargaining power.  Employee arbitration agreements, which often are a condition of employment, usually involve some degree of procedural unconscionability.  Substantive unconscionability has to do with the specific terms of the agreement – whether they are so one-sided as to be overly harsh or oppressive to the party with less bargaining power.

SC first argued that the Armendariz unconscionability analysis should not apply to an agreement signed by a contract employee: it maintained that, as an independent contractor, DeMelo was not entitled to the same level of protection given to employees under California law.  The court rejected this argument, noting that the underlying legal issue in DeMelo’s Labor Commissioner proceeding was whether DeMelo properly had been classified as an independent contractor. Declining to resolve that underlying issue, the court found that the Armendariz analysis applied in this context.

Examining the indicia of unconscionability, the court did not hesitate to invalidate SC’s arbitration agreement, saying it was so permeated with unconscionability that offending provisions could not be severed. The following were some of the terms and conditions that led to this finding:

  • The agreement stated that arbitration would be conducted by the American Arbitration Association (“AAA”), but did not explain which AAA rules would govern, nor was DeMelo provided with a copy of the governing rules or a link to them. This also increased the level of procedural unconscionability.
  • The agreement required the parties to share the costs of arbitration, which costs often are prohibitively expensive, and barred DeMelo from the relatively inexpensive hearing before the Labor Commissioner..
  • The agreement limited DeMelo’s remedies: he was barred from punitive damages, attorney’s fees, statutory penalties, and equitable relief.  The Labor Code and the California Supreme Court prohibit waiver of statutorily imposed remedies.

The DeMelo case is a useful reminder to employment counsel to carefully scrutinize arbitration terms in all types of employment contracts for compliance with the California unconscionability doctrine.