By: Kerri N. Kramer and Francesca Gonzales
Under state and federal arbitration law, the default rule is that courts, not arbitrators, decide whether a dispute is subject to arbitration. Parties can contract around this, however, with a clause in their arbitration agreement stating that the arbitrator will decide such (sometimes referred to as the “delegation clause”). When reviewing these clauses, the courts look for “clear and unmistakable evidence” of the parties’ intent to change the default rule.
Prior case law held that this intent could be shown by incorporating the rules of an arbitration provider – like JAMS or AAA – so long as those rules clearly addressed delegation. Recently, however, the California Second District Court of Appeal held that in a mandatory arbitration agreement between an employer and an hourly worker, the incorporation of an arbitration provider’s rules, without more, is not clear and unmistakable evidence of the parties’ intent to have arbitrability decided by the arbitrator. The court emphasized that in most cases, the employer should instead express the intention to delegate such issues within the language of the arbitration agreement itself.
In Villalobos v. Maersk, Inc., 2025 WL 2827951 (Villalobos), the plaintiff employee filed a class action alleging multiple wage and hour claims and unfair competition against the defendant employer and its staffing agency. The plaintiff also filed a separate representative Private Attorneys General Act (PAGA) action against the same defendants. Both cases were consolidated.
Reiterating the importance of careful drafting in arbitration agreements, the Court of Appeal also found that the agreement to arbitrate failed to encompass any portion of the plaintiff’s claim, thereby allowing it to immediately proceed in court.
The arbitration agreement at issue in this case is a familiar one to many California employers, including those in the construction industry. It consists of two separate documents: a Notice to Employees About Our Mutual Arbitration Policy (MAP) and an “Employee Agreement to Arbitrate”. Both documents required binding arbitration of all disputes with the company that relate in any way to the plaintiff’s employment. The Employee Agreement to Arbitrate stated that arbitration would be conducted under the Federal Arbitration Act (FAA) and “the applicable procedural rules of the American Arbitration Association (‘AAA’) which [the employee has] been provided an opportunity to request and review.” It did not state which of various sets of AAA procedural rules were applicable or where those rules could be found. The MAP, on the other hand, stated that AAA’s Employment Arbitration Rules would govern the arbitration procedures and stated that employees could request a copy. There is no dispute that the AAA Employment Arbitration Rules delegate arbitrability issues to the arbitrator. Nothing in either of the employer’s documents, however, stated that the arbitrator had the power to rule on the existence, scope, or validity of the arbitration agreement. Rather, they explained that the arbitrator’s role was to decide the merits of the claims.
Relying on prior case law, the employer argued that the MAP and Employee Agreement’s incorporation of the AAA rules was sufficient to show an intent to delegate validity and enforcement issues to the arbitrator. The trial court, however, found that this incorporation by reference was not enough to meet the clear and unmistakable test in the employment context. The Court of Appeal ultimately agreed.
In order to find out that the arbitrator will decide arbitrability, the Court pointed out, the employee must either find the rules on AAA’s website or request a copy from the employer, then access AAA’s 26-page document with 48 rules, one of which will tell him that the arbitrator has the power to rule on his or her own jurisdiction.
The Court concluded that in this circumstance, it was evident that only the employer knew that the agreement was supplanting the judge who ordinarily decides arbitrability issues with the arbitrator. The Court highlighted how both parties must be clear on the idea of replacing the judge with an arbitrator when the issue of arbitrability is concerned.
The Court reiterated that, barring unusual circumstances, an employer seeking to delegate issues of arbitrability must explicitly state that intent within the arbitration agreement. Without such clarity, the employer risks leaving it for the courts to resolve questions of arbitrability.
In this case, when left to make those determinations, the trial court decided that only some of the plaintiff employee’s claims were subject to arbitration, but that his minimum wage claim, derivative waiting time penalties claim, and PAGA claim would all proceed in court instead. These rulings relied, in part, on the court’s conclusion that State law, instead of the Federal Arbitration Act, governed the Parties’ agreement.
Takeaway
In a mandatory employment arbitration agreement, at least one court has now found that it is not enough to merely incorporate the arbitration provider’s rules to ensure delegation of all issues to the arbitrator. This is particularly true if the incorporation itself is unclear, or the employee must go through multiple steps to find the rules at issue.
This case should serve as yet another reminder of the need for employers to routinely review and update their arbitration agreements to keep pace with evolving case law. Employers should be cautious of adopting agreements developed for others or taking similar “one size fits all” approaches. Instead, employers should consult an experienced employment attorney to assess their individual arbitration policies and arbitration agreements, particularly those including delegation clauses.
Kerri N. Kramer is a Partner specializing exclusively in employment law. Her primary work involves helping employers develop policies, procedures, and practices to keep them out of PAGA and similar actions. She also helps defend them when such claims cannot be avoided. She can be reached at (949) 393-1400 or [email protected]. Francesca Gonzales is a law clerk at the Firm.