Temporary Staffing Agency’s Arbitration Agreement Cannot Be Enforced by Client Employer Against Directly Hired Employee

Toothman v. Redwood Toxicology Laboratory, Inc., decided May 5, 2026 by the California Court of Appeal, First Appellate District, addresses whether a temporary staffing agency’s arbitration agreement can be enforced by a client business against an employee it later hired directly. Robert Toothman was initially placed at Redwood Toxicology (“Redwood”) by Apex Life Sciences, LLC (“Apex”), a temporary employment agency.  Mr. Toothman signed an arbitration agreement with Apex covering disputes arising out of his employment with Apex or its “affiliates, subsidiaries and parent companies.” After his Apex placement ended in April 2018, Mr. Toothman was hired directly by Redwood, where he worked until June 2022 — without signing any arbitration agreement with Redwood. He subsequently filed an individual and class action lawsuit against Redwood alleging Labor Code violations arising from the time he was directly employed by Redwood.

Redwood moved to compel arbitration on three theories: (1) it was a party to the Arbitration Agreement as an “affiliate” of Apex; (2) it was an intended third-party beneficiary of the agreement; and (3) Mr. Toothman was equitably estopped from refusing to arbitrate. The court rejected all three. On the “affiliate” argument, the court found that the term — read alongside companion contract language distinguishing between Apex’s “affiliates, subsidiaries and parent companies” and its arm’s-length “Clients” — was intended to capture entities sharing common ownership or control with Apex, not unrelated client businesses like Redwood. The court observed that if the parties had intended to include Clients, they could simply have added that term to the definition of “Company,” as they had used it in the Employment Agreement.

The court also held that even if Redwood could qualify as a third-party beneficiary, the Arbitration Agreement still would not apply.  The court reasoned that the claims in Mr. Toothman’s complaint arose exclusively from his direct employment with Redwood — not from any employment with the “Company” under the Arbitration Agreement.  Thus, the claims fell outside the agreement’s substantive scope.

The equitable estoppel argument failed for the same reason: Mr. Toothman’s claims were not “dependent upon,” “founded in,” or “inextricably intertwined with” the Arbitration Agreement or the Employment Agreement.  The violations began in September 2018, well after Mr. Toothman’s Apex employment ended. The Court of Appeal affirmed the trial court’s denial of Redwood’s motion to compel arbitration.