California AB 692 limits employee clawback agreements involving bonuses, training costs, relocation expenses, and repayment obligations.
“The arbitration agreement they signed with the staffing agency covers us” is the assumption that just got tested in California’s First District — and lost.
In Toothman v. Redwood Toxicology Laboratory, Inc., filed May 5, 2026 and certified for publication, the Court of Appeal affirmed denial of an employer’s motion to compel arbitration. The fact pattern is one almost every small employer will recognize. Apex Life Sciences, a temporary staffing agency, placed Robert Toothman with Redwood Toxicology. Apex required Toothman to sign an arbitration agreement at the start. After his Apex assignment ended in April 2018, Redwood hired Toothman directly. No new arbitration agreement was executed between Toothman and Redwood. In 2022, after Toothman left Redwood, he filed a class action alleging Labor Code violations arising entirely from his direct employment with Redwood.
The court held four things. First, Redwood was not a signatory to the Apex arbitration agreement and could not, on its own, claim the rights of a party. Second, Redwood was not an “affiliate” of Apex within the agreement’s language, because the common-law thread in “affiliate” definitions is a relationship of ownership or control, not an arms-length contractual one. Third, even if Redwood could establish third-party-beneficiary status, the agreement covered disputes arising from Toothman’s employment with Apex — not disputes arising from his later direct employment with Redwood. Fourth, equitable estoppel did not apply because Toothman’s claims rested entirely on the direct-employment period, not on any agreement signed with Apex.
The small-employer failure pattern is the conversion. The staffing-agency placement works out, the employer offers the worker a direct-hire role, the worker accepts, and the onboarding paperwork on the direct-hire side never includes a fresh arbitration agreement. The employer is left assuming the agency’s paperwork “carried forward.” Toothman says it did not.
The proof pressure is procedural. When the class action lands, the motion to compel arbitration is the employer’s first defensive lever. If that motion is denied, the case proceeds in court with the cost, discovery, and class-exposure profile that comes with it. The motion is also the lever that becomes hardest to recover from, because the legal question — who signed what, with whom — is fixed by the documents the employer either has or does not have.
The corrective frame is operational. When a worker converts from staffing-agency placement to direct hire, the direct-hire paperwork is its own onboarding event. If arbitration is part of the employer’s risk posture, the agreement has to be signed with the employer, not inherited from the agency.
If conversions from staffing agencies happen at your company, a single review of your direct-hire onboarding paperwork may be all that is needed.
This post shares general information based on common patterns I see in California workplaces. It is not legal advice, does not create an attorney-client relationship, and outcomes depend on specific facts — no lawyer can guarantee a result. Past results do not guarantee or predict future outcomes. AI may have been used to create this post. All content reviewed by a CA attorney before publication. This post may be attorney advertising.