New California Law Prohibits Employers from Requiring Applicants and Employees to Sign Arbitration Agreements

By SHLC on October 22, 2019 in Uncategorized

On October 13, 2019, California Governor Gavin Newsom signed into law Assembly Bill 51—a bill which essentially makes it unlawful for a California employer to require job applicants or employees to sign an arbitration agreement as a condition of employment. Currently, the use of mandatory arbitration agreements and class action waivers is extremely common among California employers, and recent U.S. Supreme Court case law has provided strong support for their enforceability. Although the bill—which takes effect on January 1, 2020—likely will be subject to a legal challenge as being preempted by federal law, AB 51 is a clear indication of California’s intention to eliminate the use of mandatory arbitration agreements in employment relationships, and will force California employers to make some difficult decisions prior the law’s effective date.

(For the full text of AB 51, click here.)

The bill broadly prohibits any person, including employers, from requiring a job applicant or employee, as a condition of employment, continued employment, or receipt of any job-related benefit, to “waive any right, forum, or procedure” for redressing a violation of any provision of the California Fair Employment and Housing Act (“FEHA”) or California Labor Code. This specifically includes “the right to file and pursue a civil action or a complaint with . . . any court or other governmental entity.”

By including a prohibition on waiver of rights under FEHA and the Labor Code, the bill is virtually a wholesale ban on arbitration agreements in the employment context. It also calls into question the enforceability of class action waiver agreements, which generally require employees to bring any employment-related claims on an individual basis, as opposed to a class action in which the plaintiff brings claims on behalf of herself and all other similarly-situated employees. Such agreements arguably amount to the waiver of a “right,” i.e., the right to pursue class action, or of a “procedure.” In contrast, the U.S. Supreme Court recently held that class action waivers in mandatory arbitration agreements are generally enforceable, and that they do not violate the National Labor Relations Act (“NLRA”). (See our previous blog post on Epic Systems Corporation v. Lewis.)

In addition, although the law seems primarily targeted at so-called “mandatory” arbitration agreements, it also prohibits employers from using “an agreement that requires an employee to opt out of a waiver or take any affirmative action in order to preserve their rights.” Therefore, the law also affects employers who solicit arbitration agreements from their employees, even if that agreement provides the employee with an opportunity to later opt out of the arbitration agreement within a specified period of time. Prior to AB 51, California courts had viewed such opt-out provisions favorably.

Finally, based on AB 51’s placement within the Labor Code (it will become section 432.6), a violation of the law will also be a criminal misdemeanor offense.

AB 51 likely will be subject to legal challenge based on the Federal Arbitration Act (“FAA”), which generally has been held by the U.S. Supreme Court to preempt state laws that interfere with the enforcement of otherwise valid arbitration agreements. Of course, the success of any such challenge is uncertain and it may well take years before a final decision is announced.

Takeaways for Employers

AB 51 “applies to contracts for employment entered into, modified, or extended on or after January 1, 2020.” This gives employers very little time to decide what action to take in response to the new legislation.

First, employers will need to decide whether to continue to require applicants and employees to sign arbitration agreement during the remainder of 2019. By applying only to arbitration agreements entered into, modified, or extended on or after January 1, 2020, the law appears to exempt contracts formed in 2019. It is somewhat unclear whether enforcing a pre-2020 agreement after the law takes effect would violate AB 51, but the usual meaning of “extending” an agreement contemplates taking action to cause an agreement to remain in effect past its expiration date. Most employment arbitration agreements do not have an express expiration date, and thus do not need to be “extended.” On this basis, some employers may opt to use the rest of 2019 to obtain as many mandatory arbitration agreements as possible from their employees, but should consult with qualified legal counsel prior to making this decision.

Second, employers must decide whether and to what extent they will modify their practice of using arbitration agreements after the law takes effect, but before any legal challenge to the law has reached a conclusion. It is likely that there will be a swift effort to challenge the law, which may also include an attempt to prevent the law from taking effect. However, it is possible that litigation will continue for several years before a final resolution is reached, and the dispute may well go all the way to the U.S. Supreme Court. If the law does go into effect as planned, employers who continue to use mandatory arbitration agreements will be at risk of civil and criminal exposure. Nevertheless, some employers may wish to take a more aggressive approach by continuing to use mandatory arbitration agreements based on an assessment of the likelihood that a legal challenge will be successful.

However, this approach comes with risk. Under AB 51, an employer sued for requiring an employee to sign a mandatory arbitration agreement may be required to pay the attorneys’ fees of the employee who brought the lawsuit. Also, California recognizes a claim of wrongful termination in violation of public policy where an employee is terminated because the employee refuses to sign an agreement based on the employee’s good-faith belief that the agreement contains an illegal provision. Therefore, even if AB 51 is preempted by federal law, and a court eventually strikes it down, an employee (or applicant) may still have a meritorious claim for wrongful termination/failure to hire if he was fired (or not hired) after refusing to sign a mandatory arbitration agreement and he believed in good faith that the agreement was unlawful.

Employers should not delay in considering these complex and difficult questions with qualified California employment law counsel.

To read more about other recent legal developments relating to workplace arbitration agreements and class waivers, refer to our past blog entries:

Upcoming Events

This and other new California laws for employers will be discussed at our upcoming Wage and Hour Law Webinar for California Employers on November 5, 2019, as well our 2020 Employment Law Update for California Employers on December 3, 2019. For more information on these and other events, visit our Events Page.

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SHLCView all posts by SHLC