CALIFORNIA LEGISLATURE GOES ON THE OFFENSIVE AGAINST MANDATORY ARBITRATION AGREEMENTS

Practice Tips

  • Employees and new hires who have signed valid arbitration agreements before January 1, 2020, will still be bound by these agreements;
  •  Employees and new hires who have not signed valid arbitration agreements should do so before January 1, 2020; and
  •  Be on the lookout for the numerous challenges to the constitutionality of this new legislation.

On October 10, 2019, California Governor Gavin Newsom signed into law Assembly Bill 51 (“AB-51”), a bill that significantly impacts companies’ ability to use arbitration clauses in employment contracts. This new law allows employees and applicants to refuse to sign arbitration agreements and protects them from any adverse employment actions. Interestingly, former Governor Jerry Brown vetoed this same legislation on the grounds that it was likely unconstitutional. At the time, Governor Brown stated that the proposed legislation constituted “a blanket ban on arbitration agreements [that] is a far-reaching approach that has been consistently struck down in other states as violating the Federal Arbitration Act.” Nonetheless, Governor Newsom signed the legislation, citing the “#MeToo Movement” as his inspiration.

I. AB-51 Impacts the Use of Mandatory Arbitration Agreements

Under the new law, employers will no longer be able to compel workers to arbitrate claims that arise under the California Labor Code and the Fair Employment and Housing Act (“FEHA”). This would effectively provide employees with the choice to by-pass the forum of arbitration for their wage and hour claims and causes action for workplace harassment, discrimination, and retaliation. AB-51 prohibits employers from requiring an applicant or employee, as a condition of employment, continued employment, or receipt of any employment-related benefit, to waive any right, forum, or procedure for alleged violations under FEHA and the Labor Code. Violation of the new law is a misdemeanor crime. Accordingly, under AB-51, while employers can still use arbitration agreements, they can no longer make them mandatory.

Importantly, AB-51 only applies to arbitration agreements entered into, modified, or extended after January 1, 2020. Accordingly, employers may still compel employees to arbitrate their Labor Code and FEHA claims under arbitration agreements executed before January 1, 2020.

II. Uncertain Terrain for Employers

While AB-51 undoubtedly poses a challenge for California employers, it is widely anticipated that it will face a showdown in the federal courts and will ultimately be deemed void because it impermissibly conflicts with the FAA. Nevertheless, whether or not the bill is ultimately invalidated, employers must prepare for its implementation and decide how best to protect their interests.

To prepare for the challenge that AB-51 presents, we recommend that employers do the following:

1. Since the law is not yet in effect, have all employees who have not yet signed mandatory arbitration agreements, do so. Additionally, require all new hires to enter into mandatory arbitration agreements.

2. Immediately amend all arbitration clauses and/or agreements to include language affirming that the clause/agreement is governed by the Federal Arbitration Act. This will provide employers with some cover from federal law, and necessarily tee up the battle over the constitutionality of AB-51.

3. Make sure any arbitration agreements are signed and comply with other requirements, under California law, such as (1) neutral arbitrators; (2) more than minimal discovery; (3) a written-decision by the arbitrator; (4) all relief available in court; and (5) not require employee to pay unreasonable costs or arbitrator fees or expenses.

4. Pay close attention to the changing state of affairs relating to AB-51, particularly, the inevitable legal challenge to the law, as this will inform the long-term status of arbitration programs.

For more information on the potential impact of AB-51, as well as California’s extensive new slate of labor and employment laws, please reach out to the attorneys at Brown Law Group.

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