California Prohibits Most Employer Mandatory Arbitration Agreements in AB 51
Knowledge

California Prohibits Most Employer Mandatory Arbitration Agreements in AB 51

Key Takeaways:

  • AB 51 bans employers from requiring employees or applicants to enter into arbitration agreements for most employment claims.

  • AB 51 prohibits employers from threatening, terminating, or otherwise discriminating against employees or job candidates for refusing to consent to the waiver of any rights, forums, or procedures for alleged violations of the FEHA or Labor Code

  • AB 51 provides that voluntary opt-out clauses in mandatory arbitration agreements are prohibited and not enough to save such an agreement

On October 10, 2019, Gov. Gavin Newsom signed Assembly Bill (AB) 51 into law. The new legislation, codified as California Labor Code Section 432.6, places far-reaching and broad restrictions on employers that can potentially have a significant impact on all California businesses. Specifically, the law, which is set to take effect on January 1, 2020, will prohibit employers from entering into mandatory arbitration agreements for almost all employment law claims.

Impact

The bill prohibits any person or employer from requiring an applicant or employee to “waive any right, forum, or procedure” for alleged violations of the Fair Employment and Housing Act (FEHA) and Labor Code as a condition of employment, continued employment, or the receipt of any employment-related benefit. In essence, the law bans all mandatory arbitration agreements for any and all discrimination or harassment claims covered under FEHA, as well as all claims, including wage violation claims, under the Labor Code. It further prohibits employers from threatening, terminating, or otherwise discriminating against employees or job candidates because they refuse to waive rights, forums, or procedures for alleged FEHA or Labor Code violations. The law also explicitly provides that voluntary opt-out clauses in mandatory arbitration agreements are not enough to save such an agreement. In sum, unless one of the limited exceptions to this law applies, an employer may only enter into an arbitration agreement with an employee in California if that employee voluntarily and affirmatively chooses to enter into the agreement.

There is a critical pending question here as to whether courts are likely to find this provision of the statute is preempted by the Federal Arbitration Act (FAA) and, therefore, unenforceable. In this regard, the U.S. Supreme Court has repeatedly held that state laws attempting to frustrate the enforcement of arbitration agreements are generally preempted by the FAA. Quite notably, just this year, the U.S. District Court for the Southern District of New York refused to enforce a very similar ban on mandatory arbitration agreements in New York. The court specifically held that the state legislation prohibiting the enforcement of mandatory arbitration of sexual harassment claims was invalid on preemption grounds. It is inevitable that AB 51 will be challenged just as its New York counterpart, and there is a strong argument to be had that it, too, will be held as preempted by federal law. Indeed, just last year, former California Gov. Jerry Brown vetoed AB 3050, a virtually identical bill, which included a similar ban on mandatory arbitration agreements. In his veto message, Gov. Brown cited that the bill “plainly violates federal law.”

Recommendations

The bill does not apply to arbitration agreements entered into prior to January 1, 2020. Unless this bill is immediately enjoined (blocked by a court before it takes effect), AB 51 presents California employers with a catalogue of difficult decisions to make in the coming months. We encourage all California employers to review their arbitration agreements to ensure their validity and further discuss best practices in light of AB 51. Arbitration agreements included in employee handbooks, which were already under particular scrutiny in California and elsewhere in the country for various reasons, will be subject to even further scrutiny. For more information, please contact: