Hiring A Staffing Agency Employee? Have Them Sign A New Arbitration Agreement

If your company hires temporary workers directly, do not rely on the staffing agency’s arbitration agreement to protect you. A recent California appellate decision — Toothman v. Redwood Toxicology Laboratory, Inc., decided May 5, 2026 — found that such agreements may not extend to client employers. 

Background

Apex Life Sciences, LLC is an employment agency that hires and places temporary workers at other businesses. In January 2018, Apex hired Robert Toothman, and he signed an Arbitration Agreement under which he and Apex agreed to arbitrate employment disputes. The Arbitration Agreement, which was between “Employee” and the “Company,” defined “Company” as Apex and “its affiliates, subsidiaries and parent companies. . .” 

Apex placed Toothman at Redwood Toxicology Laboratory, where he worked until Redwood hired him directly. Critically, Toothman and Redwood did not enter into a separate arbitration agreement, and the documents that Toothman signed upon hire did not refer to the Arbitration Agreement with Apex.

On September 26, 2022, about three months after leaving Redwood, Toothman filed a class action against Redwood alleging Labor Code violations. 

The Court Rejected Redwood’s Three Key Arguments

Redwood moved to compel individual arbitration and dismiss the class claims under three theories. The California Court of Appeal rejected each theory, as discussed below.

1. Affiliate Theory

Redwood first argued it was a party to the arbitration agreement as an “affiliate” of Apex. 

The Court disagreed with Redwood, finding that it was not an “affiliate,” but a “client” of Apex. The Court explained that while terms like “affiliates,” “subsidiaries,” and “parent companies” involve “common control or ownership,” clients are connected to Apex through “arms-length contractual relationships.” Redwood shared no ownership or control with Apex and thus could not be considered an “affiliate” of Apex.

2. Third-Party Beneficiary Theory

Redwood next argued that, even if it was not an affiliate, it should be entitled to the benefits of the Arbitration Agreement as a third-party beneficiary. The Court did not determine whether Redwood was a third-party beneficiary. Instead, it rejected Redwood’s second theory because the incidents giving rise to the Complaint occurred starting in September 2018, after Toothman stopped working for Apex in April 2018. As such, the allegations were not within the scope of the agreement and arose exclusively out of Toothman’s direct employment with Redwood.

3. Equitable Estoppel Theory

Redwood’s final theory was that Toothman was equitably estopped from refusing to arbitrate his claims. Under the doctrine of equitable estoppel, a plaintiff may not repudiate an arbitration provision in an agreement on which he relies to assert claims against a nonsignatory defendant.

The Court found that equitable estoppel did not apply because Toothman’s claims were not “dependent upon,” “founded in,” or “inextricably intertwined with” the Arbitration Agreement. Because the allegations giving rise to the lawsuit began in September 2018, when Toothman was directly employed by Redwood, his claims depended — if on any agreement at all — on his employment agreement with Redwood, not the Arbitration Agreement with Apex.

Key Takeaways for Employers

The Toothman decision carries several important lessons for any company that uses staffing agencies:

• Get your own arbitration agreement. When you convert a temporary worker to a direct hire, it is strongly advisable you have the new employee sign an arbitration agreement at the time of hire. As the Toothman case shows, relying on a staffing agency’s arbitration agreement to cover claims post-conversion is fraught with risk. 
• Review your staffing agencies' arbitration agreements. At a minimum, confirm whether the staffing agencies you use include language in their arbitration agreements that expressly covers client companies and is not strictly limited to the period of employment with the staffing agency. If the agreement does not name or define clients as covered parties or does not cover claims beyond the term of employment with the staffing agency, it is unlikely to provide any basis for compelling arbitration of disputes arising from your own employment relationship with the worker.
• “Affiliate” means corporate relationship—not client relationship. The word “affiliates” in an arbitration agreement is a useful catch-all for related corporate entities such as, for example, branches and divisions, but not an open-ended term that sweeps in client companies. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.