February 8, 2023

Volume XIII, Number 39

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February 07, 2023

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February 06, 2023

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Court Holds That Arbitrator Must Decide Whether Partner Is An Employee

As discussed in this post from 2016, California Labor Code Section 925 prohibits an employer from requiring an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following:

  • Require the employee to adjudicate or arbitrate outside of California a claim arising in California.

  • Deprive the employee of the substantive protection of California law with respect to a controversy arising in California.

In Zhang v. Superior Court, 2022 WL 16832570, the plaintiff was a former "full interest partner" in a law firm who lived and worked in California.  He signed a partnership agreement with a broad arbitration clause that required arbitration in Chicago or New York.  Under the rules applicable to the arbitration, the arbitrator was authorized to decide issues of arbitrability.  After the law firm terminated the partner for cause and initiated arbitration, the erstwhile partner sought to avoid arbitration in New York based on Section 925.  The question that became who would decide the arbitrability of the dispute - the New York court or the arbitrator?

The Court of Appeal found in favor of the law firm, concluding:

The parties delegated questions of arbitrability to the arbitrator. The arbitrator in New York must decide if petitioner is an employee. If the arbitrator decides petitioner is an employee, the merits of the dispute must be decided in California. If the arbitrator decides petitioner is not an employee, then the merits of the dispute must be arbitrated in New York, as agreed. These conclusions preserve comity and avoid undermining the freedom of parties to determine the issues they agree to arbitrate, in consonance with longstanding FAA principles.

The widening gyre?

The holding does appear to lead to a bit of a logical gyre.  If the arbitrator finds that the partner was an employee, then Section 925 provides that "[a]ny provision of a contract that violates this statute will be voidable by the employee".   However, if the partner voids the provision requiring arbitration in New York, he would be relying arbitration in New York to void the requirement to arbitrate outside of California.

© 2010-2023 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume XII, Number 314
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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
Partner

Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...

949-851-5428
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