In Toothman v. Redwood Toxicology Laboratory, Inc., the California Court of Appeal held that a client of a staffing agency could not invoke the agency’s arbitration agreement to compel arbitration of claims arising from the worker’s subsequent period of direct employment with the client.

Robert Toothman was originally hired by Apex Life Sciences, a temporary employment agency, and signed a companion Employment Agreement and Arbitration Agreement covering disputes arising out of his employment with “Company,” defined as “Apex Life Sciences, LLC, a division of On Assignment, Inc., its affiliates, subsidiaries and parent companies.” Apex placed Toothman at Redwood Toxicology Laboratory, where Apex’s own paperwork treated Redwood as a “Client” rather than an affiliate. A few months later, Toothman’s employment with Apex ended and Redwood hired him directly, where he remained for nearly four years without ever signing an arbitration agreement with Redwood. After his Redwood employment ended, Toothman filed a class action alleging Labor Code violations occurring entirely during his period of direct employment with Redwood. Redwood moved to compel arbitration on three theories: that it could enforce the Apex agreement as an “affiliate” of Apex, as a third-party beneficiary, or under principles of equitable estoppel. The trial court denied the motion, and the Court of Appeal affirmed on each ground.

The appellate court rejected, at the outset, Redwood’s contention that submitting the Apex arbitration agreement shifted the burden to Toothman to disprove enforceability, holding that, as a nonsignatory, Redwood bore the burden of establishing it was entitled to invoke the agreement. Turning to the merits, the court determined that Redwood did not qualify as an “affiliate” of Apex. Although Redwood urged a broad dictionary definition encompassing companies with “shared resources, interests, or business dealings,” the court found that definition inconsistent with the surrounding contract language. The term “affiliates” took meaning from the company it kept, namely the surrounding references to “subsidiaries and parent companies,” each of which involved relationships of common ownership or control. The definitions of “affiliate” in Black’s Law Dictionary likewise described relationships of shareholdings or control. Redwood, by contrast, was a “Client” of Apex, defined separately in the companion Employment Agreement, and connected to Apex only through an arms-length contractual relationship. If the parties had wanted “affiliates” to reach Apex’s Clients, they could have said so directly.

The court also held that the arbitration agreement’s scope did not reach claims based on Toothman’s later employment relationship with Redwood. The agreement applied to disputes arising out of or related to Toothman’s employment with “Company,” and Toothman had stopped working for Apex (the “Company”) months before the conduct alleged in his complaint. Citing Vazquez v. SaniSure, Inc., the court reaffirmed that an arbitration agreement governing one period of employment does not automatically reach disputes arising from a later, separate period of employment. For that reason, the court found it unnecessary to decide whether Redwood could qualify as a third-party beneficiary. Even assuming it could, the agreement’s scope did not reach the claims pled. The court likewise rejected Redwood’s equitable estoppel argument, finding that Toothman’s claims were neither dependent upon, founded in, nor inextricably intertwined with the Apex agreement.

In light of Toothman, businesses that hire workers through staffing agencies, or that routinely convert temporary workers into direct hires, should treat direct-hire onboarding as a separate process from any arrangement with the staffing agency, and should ensure that every direct hire signs a new arbitration agreement with the actual employing entity at the start of the direct employment relationship. Employers should also revisit the catch-all definitions used in their existing arbitration templates (terms like “affiliate,” “related entity,” and “company”) to confirm that those definitions are precise enough to cover the entities they are intended to include.

This publication is published by the law firm of Ervin Cohen & Jessup LLP. The publication is intended to present an overview of current legal trends; no article should be construed as representing advice on specific, individual legal matters. Articles may be reprinted with permission and acknowledgment. ECJ is a registered service mark of Ervin Cohen & Jessup LLP. All rights reserved.