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AB 51: California Bans Mandatory Employment Arbitration Agreements

Author: Kyle R. Maland

December 9, 2019 10:00am

On October 10, 2019, California Governor Gavin Newsom signed Assembly Bill 51 (AB 51) into law. AB 51 seeks to reverse a series of court decisions that permit employers to unilaterally impose pre-dispute arbitration agreements on their employees as a condition of new or continued employment. Under AB 51, California employers will now be banned from compelling employees into entering mandatory arbitration agreements for nearly all employment law claims in California as a condition of employment beginning on January 1, 2020, at least for now. Despite the expansive language imposed in AB 51 that would not only prevent compelled use of arbitration agreements, but also creates a new private right of action under the Fair Employment and Housing Act (“FEHA”), there remain significant questions regarding whether AB 51 is preempted by the Federal Arbitration Act. There are certain to be legal challenges to AB 51 that could see the law tossed out or limited in scope. In the interim, California employers are caught between maintaining the status quo at the risk of substantial litigation, or changing their practices to comply with the prospective change to the law.

The Death of Mandatory Arbitration Agreements?

AB 51 adds Section 432.6 to the California Labor Code prohibiting any person from requiring an applicant for employment or employee to waive his or her rights under FEHA and the Labor Code, including the right to pursue a civil action, as a condition of employment, continued employment, or the receipt of any employment-related benefit. What this means is employers will be prohibited from compelling their new or existing employees from mandatory arbitration for any discrimination, retaliation, harassment, whistleblower, wage and hour, and other claims covered under FEHA and the Labor Code.

AB 51 also prohibits employers from retaliating or discriminating against applicants or employees who refuse to enter into banned mandatory arbitration agreements, including by terminating their employment. AB 51 amends FEHA to prescribe a private right of action for an employer’s violation of Labor Code Section 432.6. Employers who violate this section will be subject to injunctive relief, the potential for damages, and subject to an award of reasonable attorney’s fees should prospective plaintiffs prevail in enforcing their rights under 432.6. Further, violation of these new sections may be punishable as a misdemeanor.

AB 51 also anticipates the use of “opt out” clauses, by precluding such provisions from arbitration provisions as a means of making such provisions voluntary. The new law expressly states that an agreement requiring employees to opt out of a waiver or take any other affirmative action to preserve their rights is still deemed “a condition of employment.”

Will AB 51 Survive Preemption?

AB 51 seeks to insulate itself from the Federal Arbitration Act by including a provision in the law stating the bill is not “intended to invalidate a written arbitration agreement that is otherwise enforceable under the [FAA].”

Generally, the Federal Arbitration Act was enacted to ensure the validity and enforcement of arbitration agreements, including those imposed on a “take it or leave it” basis, so long as the agreements meet certain substantive and procedural fairness parameters. The purpose of the FAA is to preempt attempts such as AB 51 from restricting the use of arbitration agreements. Such attempts that are routinely shot down by the United State Supreme Court.

Proponents of AB 51 will surely argue that the bill is not preempted by the FAA because it only restricts use of “mandatory” arbitration as opposed to “voluntary” agreements. AB 51’s preemption carve out will be used to claim covered arbitration agreements are unconscionable and unenforceable on public policy grounds.

However, there are several reasons to believe AB 51 will not survive the likely onslaught of litigation attacking its legality. Last year, former California Governor Jerry Brown vetoed two similar legislative efforts, including AB 3080, which was written by AB 51’s author. Governor Brown’s reasoning is that “[t]his bill plainly violates federal law.” Also, in 2018 the Second District Court of Appeal struck down Assembly Bill 2617, which prohibited mandatory arbitration of certain civil rights claims in contracts for goods or services, on grounds that the bill was preempted by the FAA because its “restrictions discourage arbitration by invalidating otherwise valid arbitration agreements. It is precisely this sort of hostility to arbitration that the FAA prohibits.”  The U.S. Supreme Court also recently relied on the FAA to reject an argument that class action waivers contained in arbitration agreements violate the National Labor Relations Act in the Epic Systems v. Lewis case. In light of the foregoing, there is a strong likelihood AB 51 will not survive impending preemption arguments. However, the validity of the law may remain in a holding pattern for some time, leaving employers caught in the middle.

Next Steps

AB 51 places California employers in a difficult position regarding their use of mandatory arbitration agreement. Employers are faced with the decision to either continue use of mandatory agreements and face a potential violation of the law, which itself is a misdemeanor and may result in paying out substantial amounts in damages and/or attorney’s fees. Alternatively, employers may decide to modify existing agreements to best comply with the terms of AB 51. Though this law may be challenged, this process could take years to resolve, and may require a ruling from the U.S. Supreme Court. There is also no guarantee the law will be challenged in the first place.

Due to the complexity of this issue and the wide variety of arbitration programs and agreements that are in effect and could be contemplated in California workplaces, businesses operating in California should consult with their employment law attorneys before making decisions as to the continued use of mandatory arbitration agreements, or before modifying existing arbitration programs. Counsel can assist with implementing necessary changes prior to the law’s effect on January 1, 2020.

Tyson & Mendes will continue to keep you posted on the latest legal developments on this, and other Labor & Employment matters. For questions on labor and employment related matters, please contact Kyle R. Maland, Esq. at kmaland@tysonmendes.com.

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