When a worker signs an arbitration agreement with a temporary staffing agency, can the client company invoke that agreement against the worker after the client company hires him directly?
The answer is “no” according to the Court of Appeal’s decision in Toothman v. Redwood Toxicology Laboratory, Inc., No. A171567 (Cal. Ct. App. May 5, 2026). The client was not a corporate affiliate of the staffing agency, and even if the client were a third-party beneficiary of the agreement, the agreement only covered disputes arising out of the worker’s employment with the staffing agency, not the client. Likewise, equitable estoppel did not apply because the worker’s claims against the client were not intertwined with his arbitration or employment agreement with the staffing agency.
The facts
Robert Toothman signed an employment agreement and a companion arbitration agreement with Apex Life Sciences, LLC, a staffing agency, in January 2018. The arbitration agreement defined “Company” as “Apex Life Sciences, LLC, a division of On Assignment, Inc., its affiliates, subsidiaries and parent companies.” Toothman agreed to arbitrate any dispute “arising out of or related to [his] employment with, or termination of employment from, Company.”
Apex placed Toothman at Redwood Toxicology Laboratory. In April 2018, Toothman’s employment with Apex ended, and Redwood hired him directly. Toothman and Redwood did not sign an arbitration agreement, and Redwood’s onboarding documents did not reference the Apex arbitration agreement.
Toothman worked directly for Redwood until June 2022. After his employment ended, Toothman filed a wage-and-hour class action against Redwood after the conclusion of his employment. His claims covered conduct beginning no earlier than September 2018, when he was exclusively a Redwood direct employee.
Redwood moved to compel arbitration under Toothman’s arbitration agreement with Apex, asserting three alternative theories: that it was a party to the agreement as an Apex “affiliate,” that it was a third-party beneficiary, and that Toothman was equitably estopped from refusing arbitration. The trial court denied the motion. The Court of Appeal affirmed.
Redwood did not meet its initial burden of proof
The court began by addressing who bears the burden when a nonsignatory moves to compel arbitration.
When a defendant moves to compel arbitration, it has the initial burden to “produce prima facie evidence of the agreement.” “If the opposing party contests the authenticity, validity, or general enforceability of the agreement, the burden then shifts to that party to produce evidence in support of such a defense.”
Redwood argued that submitting the arbitration agreement signed by Apex shifted the burden to Toothman to show that the agreement was unenforceable. The court rejected that argument, holding that “Redwood must establish that it is a party to the Arbitration Agreement as part of its initial burden.”
Redwood was Apex’s “Client,” not “Affiliate”
Redwood argued that it was a party to the arbitration agreement because it was Apex’s “affiliate.” The court disagreed.
The arbitration agreement defined “Company” as Apex and its “affiliates, subsidiaries and parent companies.” The companion employment agreement between Apex and Toothman separately defined businesses like Redwood where Apex placed workers as “Clients.” The court held that the terms “Company” and “Clients” were not interchangeable. The parties knew how to use the word “Clients,” and their decision not to include it in the arbitration agreement’s definition of “Company” was intentional.
The agreement did not apply to Toothman’s claims if Redwood were a non-party
Redwood argued that if it were not a party to the arbitration agreement, then it was a third-party beneficiary. The court declined to reach this issue.
Even if Redwood were a third-party beneficiary, the agreement did not apply to Toothman’s claims. Toothman agreed to arbitrate any dispute “arising out of or related to [his] employment with, or termination of employment from, Company.” But Company meant “Apex,” not Redwood, and Toothman’s claims against Redwood had nothing to do with his employment with or termination from Apex. The court found this situation analogous to Vazquez v. SaniSure, Inc. where an arbitration agreement signed by an employee during her first stint of employment with an employer did not continue to apply after the employee terminated her employment and then returned for a second stint of employment. 101 Cal. App. 5th 139, 142-47 (2024).
Equitable estoppel did not apply because Toothman’s claims were not intertwined with the agreement
Redwood’s final theory was equitable estoppel. Under that doctrine, a plaintiff who relies on an agreement to assert claims against a nonsignatory cannot also repudiate an arbitration clause when his claims are “dependent upon, or founded in and inextricably intertwined with, the underlying contractual obligations of the agreement containing the arbitration clause.” Goldman v. KPMG, LLP, 173 Cal. App. 4th 209, 217-18 (2009).
Although Toothman’s claims in the operative complaint only addressed the period of time during which Toothman was Redwood’s direct employee and were therefore not intertwined with his arbitration or employment agreement with Apex, Toothman had responded to receiving a copy of the arbitration agreement by amending his class definition to exclude work performed for Redwood while the individuals were employed by a third-party. Redwood argued that the amendment was an admission that Toothman’s claims were intertwined with the Apex arbitration agreement. The court disagreed, holding that the original and amended complaint both only “alleged claims arising only from Toothman’s direct employment with Redwood, after he had left Apex” and that “[a] class amendment presumably designed to avoid other possible arbitration agreements involving other possible employees does not constitute an admission that Toothman’s claims . . . are founded in or intertwined with the Arbitration Agreement.”
Redwood also argued that Toothman could have asserted claims regarding the period of time when he was working for Redwood as an Apex employee and artfully pleaded around these claims to avoid the arbitration agreement. The court rejected this application of the “artful pleading doctrine,” holding that the “doctrine prevents plaintiffs from avoiding some unwanted legal consequence by mischaracterizing the nature of the claim they are asserting,” and “[a] decision to forgo certain claims or to limit the period for which relief is sought does not fall into that category.”
Takeaways for trial counsel
A client company that hires a worker placed by a staffing agency cannot assume that it inherits the worker’s arbitration agreement with the staffing agency. The agreement in Toothman failed to apply to the client company because the client company was not a party to the agreement, and the agreement only required arbitration of disputes arising from the employee’s employment with the staffing agency.
Client companies that regularly convert placed workers to direct hires should ensure that their own onboarding documents include an arbitration agreement, and plaintiffs’ attorneys should be aware that staffing agency documentation may bind workers to arbitration even after they transition to direct employment.
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If you have questions about arbitration agreements in a California employment or appellate context, we are glad to talk through the issues.
