Labor & Employment Law Daily Wrap Up, ARBITRATION—Cal App.: Employer did not waive arbitration, was not required to initiate the process, (Feb 21, 2025)

By Ursula Furi-Perry, J.D., MBA

The arbitration agreements stipulated that employees with employment-related legal claims must submit them to arbitration, and as such, the plaintiffs, and not the employer, were required to file a demand for arbitration.

A California appellate court reversed a lower court’s decision that an employer in a wage-hour class action suit had waived its right to arbitration. Under the arbitration agreements signed by the employees, the employer was not required to initiate the arbitration and therefore did not breach the arbitration agreements, nor waive its right to arbitration. The agreements stipulated that employees with employment-related legal claims must submit them to arbitration, and as such, the plaintiffs, and not the employer, were required to file a demand for arbitration (Arzate, et al. v. ACE American Insurance Company, No. B336829 (Cal. App. Feb. 19, 2025)).

A group of employees filed a wage-and-hour class action lawsuit against ACE American Insurance Company, alleging misclassification as exempt employees and denial of legally required benefits such as overtime pay and meal and rest periods. The employees had signed arbitration agreements as a condition of their employment, compelling them to submit any employment-related claims to final and binding neutral third-party arbitration.

Arbitration compelled. Initially, the trial court granted the employer’s motion to compel arbitration and stayed litigation. The court’s order did not address who was to commence the arbitration. When neither party initiated arbitration, the plaintiffs argued that ACE was responsible for starting the process and requested the trial court to lift the stay. The trial court agreed, ruling that ACE waived its right to arbitration by failing to initiate it within 30 days of the court’s order. ACE appealed, arguing that the court misinterpreted the contractual language.

Appealable. First, the California Court of Appeal found the order appealable under both California and federal law. Under California law, orders that function as denials of a motion to compel arbitration are appealable, the court held, and under the Federal Arbitration Act (FAA), a refusal to stay litigation pending arbitration is also appealable. The court rejected the employees’ argument under the functional equivalent doctrine, holding that the doctrine does not create a special exception for cases involving arbitration agreements, but rather is an application of the general rule that “an appeal may be taken from... an order” not specified in a statute as appealable “if in legal effect it is tantamount to one or more of the orders listed.”

No breach or waiver. Next, the appeals court held that ACE was not required to initiate the arbitration and therefore did not breach the arbitration agreements, nor waive its right to arbitration. The agreements stipulated that employees with employment-related legal claims must submit them to arbitration, the court noted, and as such, the plaintiffs, and not the employer, were required to file a demand for arbitration. The court rejected the employees’ argument that ACE’s failure to act rendered arbitration impossible, noting that nothing prevented the plaintiffs from filing a demand.

Lastly, the California appellate court held that because ACE was not contractually obligated to initiate arbitration, it did not waive its right to arbitrate by failing to do so. The trial court erred in concluding that ACE breached the agreement or acted inconsistently with its arbitration rights, the appeals court concluded, reversing the trial court’s decision.

The case is No. B336829.

Attorneys: Allan Shenoi (Shenoi & Koes) for Michelle Arzate. Susannah K. Howard (O'Melveny & Myers) for ACE American Insurance Co.

Companies: ACE American Insurance Co.

Cases: Arbitration WageHour ClassActions Exemptions StateLawClaims CaliforniaNews