California Employer Waives Arbitration by Paying Fees Late

Arbitration agreements are common in employment contracts. When correctly drafted and implemented, an arbitration agreement can prevent an employee from seeking legal recourse through court proceedings. Instead, an employee with a valid arbitration agreement must go through arbitration with their employer to resolve their dispute. However, employers must adhere to legal requirements surrounding arbitration agreements. In Suarez v. Superior Ct., Cal. Ct. App. Div. 1, Case No. D082429, the California Court of Appeal considered whether an employer's failure to pay an arbitration fee within 30 calendar days amounted to a waiver of the employer's right to compel arbitration.

Onecimo Suarez was formerly employed by Rudolph & Sletten, Inc. After leaving his employment, he filed a lawsuit against the company, alleging wage and hour violations. In Oct. 2022, Rudolph & Sletten filed a motion in the Superior Court to move the proceedings to arbitration under an employment agreement. The Superior Court granted the motion and issued the order to stay the civil case pending arbitration in late October. Suarez subsequently filed a demand for arbitration, which started the arbitration proceeding. JAMS, Inc. was assigned to arbitrate the case.

On Dec. 2, 2022, JAMS issued an invoice for the initial arbitration fee to Suarez and Rudolph & Sletten in the amount of $1,750, which was due upon receipt. The fees were allocated with Suarez owing $400 and his former employer owing $1,350. JAMS sent a request on Dec. 19 to check on the status of the required payment. However, Rudolph & Sletten did not submit its portion of the payment until Jan. 4, 2023.

Suarez filed a motion in the civil court to vacate the stay and allow his case to proceed in court because of the lateness of Rudolph & Sletten's payment. Rudolph & Sletten filed a motion to compel arbitration. Suarez argued that Rudolph & Sletten waived its right to arbitration under its employment contract by failing to pay the fee within 30 days under Cal. Code Civ. Proc. § 1281.97. Rudolph & Sletten argued that while the 30 calendar days would normally mean its payment was due on Jan. 1, two other statutes, Cal. Civ. Proc. 12 and Cal. Civ. Proc. 1010.6, combined to extend the deadline until Jan. 5, which would mean that the payment was not late.

The Superior Court granted Rudolph & Sletten's motion to compel arbitration and denied Suarez's motion to lift the stay. Suarez filed a writ with the Court of Appeal, which issued an order to show cause.

Issue: Whether the 30-calendar day requirement under Sect. 1281.97 meant that Rudolph & Sletten waived its right to compel arbitration because of the lateness of its payment?

The Court of Appeal looked at whether the 30-calendar day requirement under Sect. 1281.97 meant that Rudolph & Sletten waived its right to arbitration since the defendant submitted its payment three days late. Rudolph & Sletten argued two other statutes worked together to extend the deadline until Jan. 5. It also argued in the alternative that even if the payment was late, it was not in material breach of the arbitration agreement because of other reasons.

Under Cal. Code Civ. Proc. § 1281,97, employers must comply with a 30 calendar-day deadline for paying arbitration fees. If they don't, their failure to adhere to the timeline is a material breach that waives their right to arbitration under the arbitration agreement. The employee can then choose to pursue a legal action in court. Rudolph & Sletten argued that Cal. Code Civ. Proc. § 1010.6, which deals with the elctronic service of court documents, extended the deadline for their payment since the invoice was sent by JAMS by email. Alternatively, Rudolph & Sletten argued that Sect. 1281.97 was preempted by the Federal Arbitration Act (FAA).

The Court of Appeal began by considering whether Cal. Code Civ. Proc. § 1010.6 and § 12 worked together to effectively extend the 30 calendar-day deadline on the payment of arbitration fees required by Cal. Civ. Code Proc. § 1281.97. The court noted that the California Legislature enacted Sections 1281.97 - 1281.98 in recognition that delayed arbitration payments by employers are against public policy and prevent disputes from being efficiently resolved. The section requires the arbitration provider to send a full invoice to the parties for the arbitration fee that is due upon receipt with a 30-day grace period.

The Legislature wanted to end the problem of employees failing to pay arbitration fees when employees are required to submit to arbitration under an employment contract. The statute was enacted to provide that a failure to timely pay the fees constituted a material breach with the sanction being that the employer would then forfeit its right to go to arbitration.

Rudolph & Sletten didn't argue against the strict enforcement of the statute but instead argued that Cal. Code Civ. Proc. § 12 and § 1010.6 extended the grace period, meaning that its payment was not late. It agreed that the initial due date of the invoice was Dec. 2. However, it argued that Cal. Code Civ. Proc. § 12 extends deadlines that fall on holidays. It argued that since Jan. 1 and Jan. 2 were holidays, this meant the grace period was extended to Jan. 3. It then argued that Sect. 1010.6 added two additional days, which deals with electronic documents service. This section adds two days to service time when a document is sent electronically. Rudolph & Sletten argued that since it remitted its payment to JAMS on Jan. 4, the payment was timely since JAMS sent the invoice by email.

The court chose not to address whether Sect. 12 would extend the deadline if it fell on a holiday and instead focused on the defendant's claim that Sect. 1010.6 provided an extension of two additional days. However, the Court of Appeal noted that Sec.t 1010.6 deals with documents filed with the court, which the invoice from JAMS was not. Instead, it was sent to the parties from the arbitration provider and was not filed in court. The Court of Appeal found that Sect. 1010.6 didn't apply to this situation and thus did not extend the deadline Rudolph & Sletten had for paying its portion of the initial arbitration fee.

Next, Rudolph & Sletten argued that its failure to timely pay its portion of the fee was not a material breach because Suarez didn't pay his portion of the fee, either. The defendant argued that Suarez didn't properly commence the arbitration proceeding because he had never paid the fee. However, the court noted that the initiation of arbitration is completed by filing a motion and not by paying the arbitration fee. The court also noted that Sect. 1281.97 is focused on employers rather than employees. It stated that Rudolph & Sletten thus attempted to improperly shift its burden onto Suarez.

Finally, the Court of Appeal considered whether the Federal Arbitration Act preempts Sect. 1281.97. Rudolph & Sletten argued that while a court can invalidate an arbitration agreement based on state laws regarding contracts, it can't do so when it only deals with arbitration under the FAA's principle of equal treatment. The court noted that the second appellate division had recently rejected a similar argument. That court found that a state law is not preempted by the FAA simply because it deals with arbitration. The court found that Sect. 1281.97 doesn't prohibit or discourage arbitration agreements, so it is not preempted by the FAA. Instead, it regulates the conduct of the parties to ensure that arbitration is protected.

The Court of Appeal overruled the Superior Court and issued a writ of mandate to vacate its order compelling arbitration and to lift the stay on Suarez's civil case. This allowed Suarez to proceed in his legal action against Rudolph & Sletten in court rather than through arbitration. The court awarded Suarez his costs on appeal.

If you are involved in an employment dispute and have an arbitration agreement, you might still be able to pursue a civil action in court. Arbitration often advantages employers vs. employees. Even if you signed an arbitration agreement, it might not be valid if it wasn't drafted correctly or if your employer fails to pay the arbitration fee on time. To learn more, contact experienced employment lawyer Steven M. Sweat to request a free consultation by calling 866.966.5240.