Employment Law Alert: New California Law Prohibits Requiring Employees to Sign Arbitration Agreements

Many California employers require employees to sign mandatory arbitration agreements for a variety of strong reasons, including that such agreements can waive the right to bring an employee class action lawsuit, and in order to avoid employment cases being decided by notoriously unpredictable California juries. A new California law aims to disrupt that common practice.

California Governor Gavin Newsom recently signed into law Assembly Bill 51 to prohibit employers from requiring workers to enter into mandatory arbitration agreements for the most common types of California employment law claims. Specifically, AB 51 provides that employers may not require employees or applicants, as a condition of employment, continued employment, or the receipt of any employment-related benefit, to “waive any right, forum, or procedure” for any claim under the California Fair Employment and Housing Act (“FEHA”) (the law underlying most employee discrimination, harassment, and retaliation claims), and the California Labor Code (the body of law underlying most wage and hour claims, and many other types of claims).  The language “waive any right, forum, or procedure” obviously includes, but is not limited to, an agreement to arbitrate in lieu of pursuing court litigation.  Additionally, employers may not threaten, retaliate or discriminate against, or terminate any employee or applicant for refusal to consent to such waiver.

Notably, a violation of AB 51 will constitute an “unlawful employment practice” under FEHA, and would allow a prevailing plaintiff to obtain attorneys’ fees, along with other available remedies. In addition, violation of AB 51 may be punishable as a misdemeanor crime.

The new law states that it applies to agreements entered into, modified, or extended on or after January 1, 2020.  We find the phrase “extended” to be ambiguous, creating unfortunate uncertainty for California employers.

While at first blush AB 51 may seem to apply only to strictly mandatory arbitration clauses, the law expressly states that an agreement requiring employees to “opt out” of a waiver or take any other affirmative action in order to preserve their rights is still deemed an unlawful “condition of employment.”  In other words, opt outs are prohibited just like mandatory agreements.

AB 51 does not apply, however, to (i) post-dispute settlement agreements or negotiated severance agreements; or (ii) persons registered with a self-regulatory organization as defined by the Securities Exchange Act of 1934 (e.g., a stock exchange) or applicable regulations requiring that covered persons arbitrate disputes that arise between the person and their employer.  

We anticipate that AB 51 will be challenged in court based upon the plausible argument that it is preempted by the Federal Arbitration Act (“FAA”). Under the FAA, states may not pass or enforce laws that interfere with or limit arbitration. Over the years, the United States Supreme Court has consistently struck down state laws attempting to interfere with or stand as an obstacle against arbitration as preempted by the FAA, rendering those state laws unenforceable. We think AB 51’s future is quite uncertain, but for now it stands as a valid law that employers need to take seriously.  

It is imperative that employers utilizing arbitration agreements (including arbitration clauses contained in other agreements) seek advice from their employment law counsel promptly to discuss how to change such practices in light of AB 51 by January 1, 2020, including revisions to offer letters, arbitration agreements, or any other documents (e.g., handbooks or confidentiality agreements) that refer to mandatory arbitration as a condition of employment, continued employment, or any employment benefit. We recommend that employers also seek legal counsel regarding how they could propose optional arbitration agreements to employees in a manner that does not violate AB 51.  Many applicants/employees may still choose to sign optional agreements based upon the potential advantages of arbitration, such as the possibility of more timely and private resolution of claims as compared to court litigation.