Disclaimer: This IE-NSIGHT is provided for general informational purposes only and is not offered, nor should be construed, as legal advice.  

by: Eric Cady

On October 10, 2019, California Governor Gavin Newsom signed Assembly Bill 51 (AB-51)[1] into law, prohibiting employers from requiring their workers to enter mandatory arbitration agreements, on or after January 1, 2020, as a condition of employment, continued employment, or the receipt of any employment-related benefit.  Specifically, AB-51 adds Section 432.6to the California Labor Code and Section 12953 to the Government Code, banning employers from requiring applicants and existing employees to “waive any right, forum, or procedure” for an alleged violation of the California Fair Employment and Housing Act (FEHA) or California Labor Code.  

While AB-51 does not universally prohibit the arbitration of employment claims, the law makes clear that agreements to arbitrate such claims must be voluntary and that any requirement to “opt out” or take affirmative steps to preserve the right to civil court action are prohibited.  The law further prohibits employers from discriminating or retaliating against those who do not consent to arbitrate employment claims.  Violations of AB-51 subject employers to civil sanctions and criminal penalties, punishable by imprisonment and/or a fine.

Prior to the law taking effect, the U.S. Chamber of Commerce and other business groups, sued the State of California to challenge the enforceability of AB-51 on several grounds, including preemption by the U.S. Federal Arbitration Act (FAA), the national law that governs arbitration agreements involving parties engaged in interstate commerce. [2]  In that case, the District Court Judge issued a temporary restraining order preventing the law from entering force on its scheduled effective date, and in a subsequent ruling the Judge issued a preliminary injunction barring the enforcement of AB-51 pending the outcome of the case.[3]  On September 15, 2021, the Ninth Circuit Court of Appeals partially vacated the District Court’s preliminary injunction against the enforcement of AB-51.[4]  In concluding that most of the provisions of AB-51 are not preempted by the FAA or inconsistent with U.S. Supreme Court precedent regarding arbitration, the Ninth Circuit found that with respect to the FAA, “Congress was focused on the enforcement and validity of consensual written agreements to arbitrate and did not intend to preempt state laws requiring that agreements to arbitrate be voluntary.”  Consequently, because AB-51’s restrictions limit the formation of arbitration agreements rather than invalidating existing arbitration agreements, those provisions of AB-51 do not directly conflict with the FAA, and are not preempted by the federal law.  In its decision, the Ninth Circuit states, “[N]othing in [the FAA] grants an employer the right to force arbitration agreements on unwilling employees.  The only ‘federally protected right’ conferred by the FAA is the right to have consensual agreements to arbitration enforced according to their terms.”

On the other hand, the Ninth Circuit affirmed the District Court’s determination that the civil and criminal penalties associated with AB-51 for the act of executing an arbitration agreement conflicted with the FAA and thus were preempted to the extent they applied to executed arbitration agreements within the scope of the FAA.  As a result, California employers can still be subject to civil and criminal penalties if they terminate an employee for not signing an agreement to arbitrate employment claims, or an applicant is not hired because they refused to sign an arbitration agreement covering such claims.

Notwithstanding the prohibitions set out in AB-51, California employers may continue to ask, but not require, applicants and employees to enter pre-dispute arbitration agreements and have voluntarily signed arbitration agreements enforced.It is widely expected that this case will likely be petitioned for an en banc review or appealed to the U.S. Supreme Court.  However, for now, California employers must follow AB-51 and not condition prospective or continued employment on the execution of an arbitration agreement to resolve employment claims.  In the meantime, California employers should review their arbitration agreements that were enter.

[1] Assembly Bill 51, 2019 Cal. Stats. Ch. 711.

[2] 9 U.S.C. §§ 1-14.

[3] Chamber of Commerce of the United States of America v. Becerra, No. 2:19-CV-02456-KJM-DB (E.D. Cal. Feb. 7, 2020).

[4] Chamber of Commerce of the United States of America v. Bonta, No. 20-15291 (9th Cir. Sept. 15, 2021).

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