Third Time's A Charm: Governor Signs Legislation Prohibiting Mandatory Arbitration Agreements
Effective January 1, 2020, California employers may no longer require an employee or applicant to agree to arbitrate certain employment-related claims as a condition of employment.
On October 10, 2019, Governor Newsom signed AB 51, which purports to prohibit mandatory arbitration agreements between employers and employees for claims under the Fair Employment and Housing Act (FEHA) and the Labor Code.
Here is AB 51 at a glance:
The bill will be codified as a new section 432.6 in the Labor Code.
It prohibits any person from requiring an applicant or employee to "waive any right, forum, or procedure" for a violation of the FEHA or the Labor Code, which includes the right to file a civil complaint in court or a complaint with government agency.
It invalidates opt-out arbitration agreements that require employees to take steps to preserve their rights to file a civil complaint against the employer.
It makes a violation of Labor Code section 432.6 an "unlawful employment practice" under the FEHA.
It includes an anti-retaliation provision that prohibits employers from retaliating against an applicant or employee who refuses to agree to an arbitration agreement.
It does not apply to "post-dispute settlement agreements or negotiated severance agreements."
It applies to agreements "entered into, modified, or extended on or after January 1, 2020."
By way of background, AB 51 is the third attempt by the California Legislature to invalidate employer-employee mandatory arbitration agreements, which are widely in use among California employers. The previous administration vetoed the Legislature's two prior efforts based, in large part, on questions relating to the legality of the statute. Indeed, employer groups are already poised to challenge AB 51 in federal court on the basis that it is preempted by the Federal Arbitration Act (the FAA). The drafters of AB 51, anticipating a legal challenge, have attempted to address this by including subsection (f) which states, "nothing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the [FAA]." Proponents of the bill contend that AB 51 will pass judicial scrutiny because it only applies to "mandatory" arbitration agreements, arguing that employers may still ask employees to voluntarily agree to arbitration agreements.
While a legal challenge may delay implementation of the law (i.e., through an injunction), employers should take notice and prepare accordingly. How an employer decides to respond to AB 51 will vary, based on a number of factors. However, if an employer is currently weighing whether to implement a mandatory arbitration agreement program with employees, it should make sure to act promptly and certainly before January 1, 2020. Such agreements must be drafted carefully in order to comply with current California law and also to anticipate the legal challenges that will be made to invalidate AB 51.