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Employment Arbitration Agreements in California Hang by a Thread

On October 10, 2019, Governor Newsom signed AB 51, codified as Labor Code section 432.6, which prohibits California employers from requiring an employee to sign an arbitration agreement “as a condition of employment, continued employment, or the receipt of any employment-related benefit.” Effective January 1, 2020, this new law “does not apply to postdispute settlement agreements or negotiated severance agreements.” 

AB 51 will very likely face fierce challenges in the courts. As early as 1984 in Southland Corporation v. Keating, the United States Supreme Court has invalidated California’s attempts to limit arbitration agreements and held that “Congress intended to foreclose state legislative attempts to undercut the enforceability of arbitration agreements” through the Federal Arbitration Act (FAA). 465 U.S. 1, 16 (1984). The California Legislature’s reason for enacting AB 51 is “to ensure that all persons have the full benefit of the rights, forums, and procedures established in the California Fair Employment and Housing Act . . . and the Labor Code.” Such reasoning, however, runs directly contrary to the Supreme Court’s reasoning in allowing employment arbitration agreements through the FAA because “[b]y agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum.” Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 123 (2001).

In fact, the Supreme Court has recognized the benefits of employment arbitration agreements. Such contracts “allow parties to avoid the costs of litigation, a benefit that may be of particular importance in employment litigation, which often involves smaller sums of money than disputes concerning commercial contracts. These litigation costs to parties (and the accompanying burden to the courts) would be compounded by the difficult choice-of-law questions that are often presented in disputes arising from the employment relationship, [citations omitted], and the necessity of bifurcation of proceedings in those cases where state law precludes arbitration of certain types of employment claims but not others.” Id. at 121.

What’s Next for Employers?

Though AB 51 severely limits when employment arbitration agreements may be enforced, it does not completely ban all employment arbitration agreements in California. There is a specific carve out for “a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act.” This means that, under AB 51, employment arbitration agreements in California may be valid if employees voluntarily choose to sign such agreements.

Employers who currently have arbitration agreements should contact their Arent Fox team in order to evaluate and consider revising their agreements before January 1, 2020 to avoid any unlawful employment practices.


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