California Legislature Targets Arbitration Agreements

In October 2019, California Governor Gavin Newsom signed legislation which purports to make it illegal for an employer to require arbitration of certain types of statutory claims.  The law, AB 51, specifically prohibits requiring any applicant for employment or any employee to sign an arbitration agreement waiving the right to a jury trial as a “condition of employment, continued employment, or the receipt of any employment related benefit.” The statute specifically prohibits agreements to arbitrate claims under the Fair Employment Housing Act (FEHA) and California Labor Code. 

The law was obviously intended to put a break on the proliferation of arbitration agreements, which are now all too common in the employment setting.  Its effect may be short-lived, however, due to challenges that will be made to it on the grounds that it is preempted by the Federal Arbitration Act (FAA). 

AB 51 provides that an agreement that requires an employee to opt out of a waiver of their rights or to take any affirmative action to preserve their right to a jury trial is deemed a condition of employment.  It also provides that in addition to injunctive relief and any other remedies available, a court may award a prevailing plaintiff enforcing their rights under the statute reasonable attorneys’ fees, and makes the violation of the statute a misdemeanor.  

AB 51 does not apply to any post-dispute settlement agreements or negotiated severance agreements.  It also specifically provides it applies to contracts of employment entered into, modified, or extended on or after January 1, 2020.  Therefore, AB 51 exempts all existing arbitration agreements from its scope, and as a result, such agreements will remain enforceable notwithstanding the new law. 

AB 51 expressly provides that it is not intended to invalidate a written arbitration agreement that is otherwise enforceable under the FAA.  The FAA applies to contracts evidencing a transaction involving commerce, which has been a construed to mean agreements “affecting” interstate commerce.  Allied-Bruce Terminix Companies, Inc. v. Dobson (1995) 513 U.S. 265.  This “affecting commerce” standard in section 2 of the FAA must be distinguished from the much narrower “involving commerce” exemption specified in section 1 of the statute, which applies to transportation workers who perform services in the channels of interstate commerce.  Accordingly, while a transaction involving interstate commerce is a prerequisite to establishing that an agreement is covered by the FAA, workers who provide services in the “channels of interstate commerce,” such as interstate truck drivers or other transportation workers, are not covered by the FAA.  Therefore, arbitration agreements with transportation workers in California are subject to AB 51’s restrictions regardless of pre-emption arguments. 

Employers are coping with the new law in different ways, depending on the level of risk that they decide to tolerate.  Most arbitration agreements do not need to be revised unless the employer is willing to exempt the FEHA and Labor Code claims, which are the basis for most employment related-lawsuits.  Moreover, arbitration agreements remain enforceable even if they violate AB 51, so long as they are within the ambit of the FAA.  What AB 51 attempts to make unlawful is to require that that employees enter into such agreements; but the Supreme Court has expressly acknowledged that such barriers to arbitration are invalid under the FAA, as Governor Brown concluded in vetoing a similar bill (AB 3080) last year.  Nevertheless, as result of the potential misdemeanor penalties and attorneys’ fees that a violation of the statute can result in, many employers are deciding to make arbitration agreements covering FEHA and Labor Code claims voluntary beginning on January 1, 2020, at least until the dust of the preemption battle settles. 

Employers with questions regarding arbitration agreements and AB 51 may contact the authors or their usual employment law counsel at Atkinson, Andelson, Loya, Ruud & Romo.

This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process. 

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