MANDATORY ARBITRATION AGREEMENTS – A THING OF THE PAST?
September 20, 2021
If your company has implemented arbitration agreements with your employees, or is considering doing so, listen up! Right now, California law is in a state of flux regarding workplace arbitration agreements and here is why.
Passage of AB 51 and its subsequent litigation history
In 2019, in the midst of the #MeToo movement, California Governor Gavin Newsom signed Assembly Bill 51 (“AB 51”), a pro-worker law and the first and broadest of its kind, to limit workplace arbitration agreements. In essence, the law subjects employers to civil and criminal (up to 6 months in jail!) sanctions for requiring arbitration agreements of particular claims in employment contracts. AB 51 specifically added Labor Code section 432.6 to allow employees and job applicants to sue employers in court for violations of the Fair Employment Housing Act (FEHA) or provisions of the Labor Code despite the existence of an arbitration agreement barring such actions. In order for the law to not conflict with the Federal Arbitration Act (“FAA”), however, the Legislature crafted the language to exclusively focus on pre-arbitration agreement activity so as to not bar the actual enforcement of arbitration agreements.
Businesses were quick to jump on this problematic law prompting the United States and various chambers of commerce to seek a preliminary injunction at the federal district court level. Their reasoning? The FAA wholly preempts AB 51. An Eastern District of California judge agreed concluding that AB 51 (1) “is preempted by the FAA because it discriminates against arbitration” and (2) “interferes with the FAA’s objectives.”
Fast forward to this past week. A Ninth Circuit Court of Appeals panel held in a 2-1 decision that AB 51 is not preempted by the FAA, thus rejecting most of the district court’s order. The majority opinion carefully distinguished between consensual versus conditional agreements in the pre-agreement phase. In other words, imposing penalties on employers for these arbitration agreements does not conflict with the FAA if the contract is made conditional upon employment. However, if the arbitration agreement was consensual between employer and employee, no criminal or civil sanctions may be imposed. The panel interpreted AB 51 as focusing on the consensual nature of the arbitration contract, which, according to the FAA, is a matter left to the individual states to handle. The bottom line? Businesses are barred at this moment from mandating workers to enter into agreements to arbitrate FEHA and Labor Code claims.
I’m an employer, what do I do now?
In order to avoid potential penalties, arbitration agreements should not be made a condition of employment. Rather, the agreement should be consensual between employer and employee. If the employee elects not to sign the arbitration agreement, it should be left at that. In terms of timing, Labor Code section 432.6 only applies to arbitration agreements that were entered into, modified or extended on or after January 1, 2020.
Looking forward
The Ninth Circuit dissent seemed to leave the possibility of further litigation open. For now: (1) Do not use an arbitration agreement that is mandatory as a condition of employment and (2) If the employee does not sign the arbitration agreement, then it is likely not going to be valid or enforceable. Employers should keep up to date on this issue as it is entirely conceivable that the case could head to a larger panel within the Ninth Circuit or even make its way up to the Supreme Court. As always, when in doubt regarding your company’s arbitration policies or if you have any other employment law concern, contact the attorneys at McKague Rosasco LLP for help keeping up-to-date with the law.
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