Mandatory employee arbitration in limbo in California

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The California legislature and courts have been skeptical of mandatory arbitration in employment and consumer cases and have for years looked for ways to declare agreements to arbitrate unenforceable. But these efforts have created a complicated dance involving the Federal Arbitration Act (FAA) and the federal courts, as the FAA prohibits states from passing laws that interfere with the ability of two parties to consent to mandatory arbitration. In most cases, the federal courts have found that the FAA invalidates California laws and court rulings limiting the use of mandatory arbitration agreements.

In yet another effort to fight mandatory arbitration, in 2019 the California Legislature enacted AB 51, which makes it unlawful for employers to condition employment or a benefit of employment on the employee waiving their right to trial and arbitrating their disputes with their employer, among other things. AB 51 also makes it unlawful to threaten, retaliate, terminate, or discriminate against an applicant or employee because they refuse to consent to such a waiver.

The California legislature and courts have been skeptical of mandatory arbitration in employment and consumer cases and have for years looked for ways to declare agreements to arbitrate unenforceable. But these efforts have created a complicated dance involving the Federal Arbitration Act (FAA) and the federal courts, as the FAA prohibits states from passing laws that interfere with the ability of two parties to consent to mandatory arbitration. In most cases, the federal courts have found that the FAA invalidates California laws and court rulings limiting the use of mandatory arbitration agreements.

In yet another effort to fight mandatory arbitration, in 2019 the California Legislature enacted AB 51, which makes it unlawful for employers to condition employment or a benefit of employment on the employee waiving their right to trial and arbitrating their disputes with their employer, among other things. AB 51 also makes it unlawful to threaten, retaliate, terminate, or discriminate against an applicant or employee because they refuse to consent to such a waiver.

Unsurprisingly, a number of business groups filed a lawsuit to enjoin AB 51’s enforcement as violating the FAA. At the district court level, the court held that AB 51 is preempted by the FAA, effectively allowing employers to continue to enforce employment contract provisions that may have otherwise violated AB 51. The California Attorney General appealed this ruling to the Ninth Circuit.

In September of 2021, the Ninth Circuit reversed in part and upheld in part the district court’s ruling, finding that parts of AB 51 are not preempted by the FAA. It upheld the sections that prohibit employers from conditioning employment on trial waivers and arbitration, finding that these sections of the law address pre-contract behavior and therefore do not interfere with two parties ability to consent to enter into an arbitration agreement. Under the reasoning of the Ninth Circuit, mandatory arbitration agreements are enforceable, but only if both parties have a choice when entering into such an agreement.

As a result, California employers are left wondering what AB 51 means for the future of employment arbitration in California. We know that AB 51 does not affect arbitration agreements that pre-date January 1, 2020. In addition, we know AB 51 does not alter any of the already existing California requirements for valid arbitration agreements (e.g., that the employer bear costs unique to arbitration, that the agreement must allow for all remedies an employee can recover in court and reasonable discovery, that the agreement provide for a neutral arbitrator and the issuance of a written reasoned award, etc.).

What we do not know is whether employers will be able to enforce employee arbitration agreements entered into in 2020 and beyond. As of this writing, parts of AB 51 are enforceable. The business groups that challenged the law will almost certainly appeal the case to the US Supreme Court, but the Court may not take the case up and if it does, it could take years to decide the case.

In the meantime, employers should evaluate their options with competent counsel. AB 51 does not prevent any employer from proposing an arbitration agreement or any other waiver of procedural rights to any employee, so a well-designed proposal could still protect an employer from some costly employment litigation. Further, businesses that catch wind of an employee legal claim should contact counsel immediately to evaluate whether they can enforce an arbitration agreement. During this period of uncertainty, no employer can assume that they have the protection of a mandatory arbitration agreement in place, and should act now to protect themselves from potentially costly lawsuits.