New Law Prohibits Mandatory Employment Arbitration Agreements

After years of trying and rejections by former governors, a bill banning mandatory employment arbitration agreements in California has become law.

Gov. Gavin Newsom on Oct. 10 signed into law Assembly Bill 51, which prohibits almost all employment arbitration agreements, starting Jan. 1 next year. But because the new law conflicts with federal law, it will most certainly be challenged in court.

That said, because it is now the law of California, employers would be wise to understand just what it does and how they should change their employment policies and agreements to keep from running afoul of AB 51.

AB 51 broken down

The new law bars employers from requiring applicants, employees and independent contractors to sign mandatory arbitration agreements and waive rights to filing lawsuits if they file a complaint for:

  • Racial discrimination
  • Religious discrimination
  • National origin or ancestral discrimination
  • Disability discrimination
  • Sex or sexual orientation discrimination
  • Age discrimination
  • Discrimination based on pregnancy or related conditions
  • Sexual and other forms of harassment
  • Wage and hour issues
  • Other protections under the California Fair Employment and Housing Act (FEHA) and California Labor Code.

In addition, the bill creates a new private right of action under the state’s FEHA, meaning that a company that requires staff to sign a mandatory arbitration agreement could be subject to a lawsuit by that employee. This provision exposes California employers to another layer of costly litigation related to arbitration agreements.

And any employee who successfully challenges a violation of the law would also be entitled to attorneys’ fees.

Legal issues

One problem for this new legislation is that it may violate federal law, as former Gov Jerry Brown noted when he vetoed a similar bill in 2018. He said at the time: “Since this bill plainly violates federal law, I cannot sign this measure.”

Many legal analysts predict that AB 51 will be overturned once challenged in court on the grounds that is preempted by the Federal Arbitration Act (FAA), which would eventually invalidate the law.  Such a challenge could mean that the law’s validity may remain unsettled for some time.

The FAA was enacted in 1925 by Congress to ensure the validity and enforcement of arbitration agreements. State laws attempting to interfere with arbitration have been repeatedly and consistently struck down by the U.S. Supreme Court, as preempted by the FAA.

What you should do

AB 51 applies to contracts entered into, modified or extended on or after Jan. 1, 2020. If you require new employees to sign arbitration agreements, you could be at risk of violating the new law.

Do not consider including an opt-out clause in your agreements, as the bill prohibits employers from using voluntary opt-out clauses.

The best course of action is to contact your legal counsel to see if you should continue including mandatory arbitration agreements in new employment contracts, and also whether you need to modify any existing agreements you may have.

Leave a Reply

Your email address will not be published. Required fields are marked *