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Employment contracts and arbitration clauses: Factors impacting enforceability

Employers occasionally want to resolve certain disputes with employees through arbitration rather than through the civil court process.

Arbitration can often be quicker, less costly, more private, and give the parties more control over the process than going through the civil courts (i.e., selecting dates and choosing who the arbitrator will be).

However, employers need to be careful when drafting an arbitration clause in an employment contract, as it is easy to make an error that results in the arbitration clause being unenforceable.

For example, if the arbitration clause purports to limit an employee’s ability to pursue a complaint process or dispute mechanisms established by statute – such as the complaint mechanisms from the Employment Standards Act of Ontario (the “ESA”) – that arbitration clause may be deemed unenforceable.

In Wasylyk v Lyft, 2024 ONSC 664 (“Wasylyk”), the court provided some guidance on what factors may be considered when assessing the enforceability of an arbitration clause in relation to the ESA.

Background

Wasylyk involves a class action proceeding brought against Lyft. The proposed class action involves allegations that Lyft breached the ESA and includes the issue of whether the lead plaintiff, and other Lyft drivers, were employees under the ESA.

To become a Lyft driver, the plaintiff, and other Lyft drivers, had to create a user account and enter into a terms of service agreement with Lyft which included an arbitration agreement. Under the terms of service agreement, drivers had the ability to opt out of the arbitration agreement by notifying Lyft in writing that they wanted to opt out of it (as directed by and within the time period set out within the agreement). The plaintiff did not do so.

In this motion, Lyft sought an order staying the class action in favour of arbitration based on that arbitration agreement.

The court’s decision

The court found the arbitration agreement to be enforceable, granted Lyft’s motion, and stayed the proposed class action.

In coming to this determination, the court found:

• The arbitration agreement was accessible. There were no significant barriers in terms of expense or inconvenience. Lyft established within the terms of the agreement that they would pay any fees unique to arbitration except the filing fee, which the driver would be expected to pay a portion of. Further, the agreement explicitly sets out that the arbitration would take place in the location of the driver. Finally, there was also a written and/or phone arbitration option for claims of $10,000.00 or less.

• There was no contractual uncertainty. There was no uncertainty about the scope of the arbitration agreement. The court did not accept the plaintiff’s argument that there was uncertainty with respect to the procedure for the arbitration, stating that the manner of arbitration is not an essential term and the flexibility provided by the arbitration agreement may actually be beneficial.

• The arbitration agreement was not unconscionable. The elements of unconscionability are: pronounced inequality of bargaining power; substantially unfair bargain; and the party with more power taking advantage of the vulnerability of the other party. While the court assumed for the purposes of this analysis that there was inequality of bargaining power, it did not accept that the other two elements were met. The time, place, cost, procedure, and law set out by the agreement was accessible, feasible, and fair.

• The arbitration agreement was not against public policy. The court, citing previous case law, stated that “public policy actually favours arbitration agreements as an acceptable, preferable, and generally available alternative to court actions.”

• The arbitration agreement did not contract out of the ESA. The terms of the agreement did not exclude a driver’s ability to utilize the statutory procedures and remedies available under the ESA. While the agreement was not as straightforward as other arbitration agreements have been in other cases (which have expressly stated that employees continued to be able to pursue remedies/forums prescribed by statute), the arbitration agreement did state that disputes were to be arbitrated “to the extent permitted by law” or “except as … required by law”, etc. These phrases meant that the contract did not attempt to prevent the drivers from using the dispute mechanisms established by the ESA.

Key takeaway(s) for employers

This case provides some important guidance for employers who want to include an arbitration agreement within their employment contracts.

It is important that the factors examined in this case – accessibility, contractual uncertainty, unconscionability, public policy, and contracting out of statute – are considered when drafting the language of an arbitration agreement. Employers may want to consider seeking legal assistance to ensure enforceability when drafting such arbitration agreements.

John Hyde is the managing partner at Hyde HR Law in Toronto. He advises management on all aspects of employment and labour law, including representation before administrative tribunals, collective agreement negotiation, arbitrations, wrongful dismissal defence and human rights.