Employer Can’t Enforce Staffing Agency Arbitration Agreement, California Court Rules

Quick Hits

• The California Court of Appeal, First Appellate District, affirmed the holding that an employer could not enforce an arbitration agreement since it was neither a signatory to the contract nor an “affiliate” of the staffing agency.
• The court further held that even if the employer was a third-party beneficiary of the arbitration agreement, the agreement did not cover claims arising after the employment with the staffing agency ended.
• The court further held that equitable estoppel did not apply because the claims were not intertwined with the agreement.

In Toothman v. Redwood Toxicology Laboratory, Inc., the First Appellate District held that an employer could not enforce the arbitration agreement because it was not a party to the contract. The court further held that the agreement did not otherwise cover the former employee’s claims based on agency or third-party beneficiary theories.

Employee Signs Arbitration Agreement With Staffing Agency

The former employee, Robert Toothman, signed the arbitration agreement with Apex Life Sciences, LLC, before being placed with the employer in 2018. Months later, his employment with Apex ended, and he was hired directly by the employer. He did not sign another arbitration agreement. In 2022, he filed a putative class action against the employer. The employer sought to enforce the arbitration agreement signed with Apex. The trial court denied the motion.

The arbitration agreement in question defined the contracting “Company” (i.e., Apex) as the staffing agency together with “its affiliates, subsidiaries and parent companies.” It required arbitration of disputes “arising out of or related to [Toothman’s] employment with, or termination of employment from, Company.” Separately, the companion employment agreement defined the third-party businesses where the agency placed temporary workers as “Clients.”

Employer Not a Party to Arbitration Agreement

The First Appellate District held that the client’s employer was not a party to the arbitration agreement. The employer argued that, as a client, it could be covered by the term “affiliates.” But the First Appellate District found that the common thread in definitions of “affiliates” is a relationship of ownership or control. That was not present here. The court noted that the former employer was a client of the staffing agency, “connected” through “arms-length contractual relationships.”

Further, the court pointed to other language in the arbitration agreement and employment contract regarding Toothman’s at-will assignment status as supporting the interpretation that Toothman was an employee of Apex when he signed the agreement.

Agreement Did Not Cover Employee’s Claims

The appellate court held that even if the employer could establish third-party beneficiary status, the arbitration agreement did not cover the former employee’s claims. The agreement covered disputes arising out of or related to the worker’s employment with the staffing agency. The claims in the class action arose after Toothman began working directly for the employer.

Finally, the court rejected the employer’s argument that the former employee be equitably estopped from refusing to arbitrate his claims. The court explained that equitable estoppel allows a party that did not sign a contract to enforce an arbitration agreement if the claims are “dependent upon” or “inextricably intertwined with” the contract containing the arbitration agreement. Here, however, the court found that the former employee’s claims rested entirely on his direct employment with the employer, not on the staffing agency’s employment or arbitration agreement. “If the claims depend on any agreement, it is Toothman’s employment agreement with [the employer],” the court stated.

Key Takeaways for Employers

The Toothman decision is a useful reminder that California courts continue to scrutinize arbitration agreements carefully before enforcing them. Specifically, the First Appellate District refused to enforce the arbitration agreement because the employer was not a signatory to the contract and it did not cover claims arising after the former employer’s employment with the temporary staffing agency.

The case thus suggests that it may be more difficult for employers to rely on agency or third-party beneficiary theories to enforce arbitration agreements with a related entity. Employers that wish to handle employment-related claims in arbitration may want to ensure they execute arbitration agreements directly with former staff agency workers who were placed at their worksites by a staffing agency.

Ogletree Deakins’ California offices and California Class Action and PAGA Practice Group will continue to monitor developments and will provide updates on the Arbitration and Alternative Dispute Resolution, California, and Class Action blogs as additional information becomes available.

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