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The scenario is typical. An employer uses a staffing agency for extra workers and pays the staffing agency “above and beyond” to take care of all things employment-related. The employer thinks that’s taken care of it. The employee had no say in this and begs to differ. A disgruntled employee then sues the employer in court, who turns to the staffing agency arbitration agreement with the employee to point out that the parties agreed to arbitrate their disputes. But did they?

A California Court of Appeal recently denied an employer’s motion to compel arbitration against an employee because it disagreed that the arbitration agreement between the employee and staffing agency should also apply to the employer. Toothman v. Redwood Toxicology Laboratory, Inc., decided on May 5, 2026, found that the host employer was not an “affiliate” of the staffing agency and therefore was not covered by the staffing agency’s arbitration agreement with the employee. The result: the employer must now defend in court a wage and hour class action it believed the employee had waived. This is a problem that could have been avoided.

The Key Facts That Swayed the Court

In Toothman, Redwood Toxicology Laboratory, Inc. (“Redwood,” the defendant-employer) tried to avoid a class action by invoking an arbitration agreement signed by its employee, Robert Toothman, and Apex Life Sciences, LLC (“Apex”), the staffing agency that initially employed Toothman and placed him with its client, Redwood.

For the first few years that Toothman worked at Redwood, he did so as an employee of the staffing agency, Apex. When he was hired by Apex, Toothman did sign an arbitration agreement. The arbitration agreement was between the “employee” and the “Company,” which was defined as Apex and “its affiliates, subsidiaries and parent companies...” (emphasis added). Toothman also signed an employment agreement, which stated that Apex is “engaged in the business of hiring contract employees to perform services on a temporary basis to third party businesses,” which was defined as “Clients.”

Toothman’s employment with Apex ended in April 2018. Redwood then immediately hired Toothman directly. Redwood did not have Toothman sign a new arbitration agreement directly with it.

In September 2022, Toothman filed a wage and hour class action against Redwood, with a lookback period going back to September 2018 (after his relationship with Apex ended). Redwood learned about the existence of the arbitration agreement when Apex produced it in response to a subpoena.

Although it was not a signatory to the arbitration agreement, Redwood filed a motion to compel Toothman’s lawsuit to arbitration on the basis that Redwood was an “affiliate” of Apex and, alternatively, a third-party beneficiary of the arbitration agreement so Toothman was equitably estopped from refusing to arbitrate.

The Court’s Review of the Arbitration Agreement

The Court rejected Redwood’s arguments on three grounds:

1. The Court rejected Redwood’s argument that it was an “affiliate” of Apex and therefore a direct party or express beneficiary to the arbitration agreement. The Court found that in construing the employment agreement and arbitration agreement together, there was no intent to include Apex’s “clients” in the arbitration agreement’s definition of “Company.” The Court determined it was not reasonable for Apex to prescribe the dispute resolution procedure that governs the employment dispute between one of its clients (Redwood) and that client’s own direct employees (who do not have an employment relationship with Apex), especially without prior notice to the client.
2. The Court did not decide whether Redwood was a third-party beneficiary of the Apex arbitration agreement. However, the Court reasoned that even if Redwood was a third-party beneficiary, the arbitration agreement still did not apply to Toothman’s claims because the alleged employment violations occurred after Toothman’s employment with Apex ended. Thus, the alleged conduct was not within the scope of Toothman’s employment agreement with Apex.
3. The Court rejected the argument that Toothman was equitably estopped from refusing to arbitrate his claims. The Court found that Toothman’s claims were not dependent upon nor inextricably intertwined with the arbitration agreement or the employment agreement with Apex because his claims stemmed from his direct employment with Redwood, after his relationship with Apex ended.

Key Takeaways for Employers

• Do not assume that temporary employees who have been placed by a staffing agency have signed an arbitration agreement with the staffing agency. An arbitration agreement is the only mechanism by which California employeers can enforce an employee’s waiver of their right to bring a class action. Without one, there is no waiver.
• Even if the temporary employee placed by a staffing agency did sign an arbitration agreement with the staffing agency, do not assume you (the client employer) are covered by that arbitration agreement.
• If your company directly hired an employee who previously worked through a staffing agency, make sure the employee signs a new arbitration agreement along with other new onboarding documents.

California case law on the enforceability of arbitration agreements is constantly developing. It is only compounded by the added wrinkle of a staffing agency relationship.

If you have questions about arbitration agreements or about your staffing agency agreements (do they protect you fully?), reach out to your Greenberg Glusker employment attorney to discuss the best approach for your business.