California Employers Forbidden to Require Employees to Agree to Arbitrate Certain Disputes
On October 13, 2019, California Governor Gavin Newsom signed into law Assembly Bill 51 (“AB 51”). In a momentous upheaval of existing law, AB 51 prohibits California employers from requiring employees to agree to arbitrate certain disputes as a condition of new or continued employment. AB 51 also prohibits employers from retaliating against any employee who refuses to agree to arbitration. AB 51 takes effect January 1, 2020.
AB 51 is one of many bills to pass the desks of California governors since the beginning of the #MeToo movement. This bill specifically forbids employers from requiring employees to “waive any right, forum, or procedure” for claims arising from the Labor Code or the California Fair Employment and Housing Act (“FEHA”), California’s principal statute outlawing employment and housing discrimination. While AB 51 is a response to the #MeToo movement, and gained popularity as a measure aimed at bringing to light workplace sexual misconduct, AB 51’s reach is extensive, and touches any mandatory employment agreement which compels arbitration of any claim brought pursuant to the Labor Code or the FEHA.
Is AB 51 Preempted by the Federal Arbitration Act?
This is not the first time in recent memory that the California State Assembly has attempted to pass a law limiting an employers’ ability to use arbitration agreements. However, this is one of the few times the State Assembly has succeeded.
Former Governor Jerry Brown had twice vetoed substantially similar bills, asserting in his veto messages that the bills cannot stand because they expressly conflict with the broad reach of the Federal Arbitration Act (“FAA”). As we detailed previously , in 2015 Jerry Brown vetoed a bill that would have prohibited arbitration in claims arising under the California Labor Code in employment agreements. His veto message stated that the United States Supreme Court has made clear that blanket bans on arbitration are impermissible.
In 2018, the then-Governor doubled down on this stance after the State Assembly passed a bill strikingly similar to AB 51 that prohibited employers from requiring employees to agree to arbitrate harassment and discrimination claims as a condition for new or continued employment. When vetoing the legislation, then-Governor Brown reiterated that the Supreme Court has made clear that broad bans on mandatory arbitration agreements are preempted by the FAA because they unduly impede arbitration.
The Supreme Court has consistently upheld the supremacy of the FAA against attempts to limit arbitration. In the 2018 case Epic Systems Corp. v. Lewis, the Supreme Court held that employers may enforce individual arbitration proceedings where an employee had previously agreed to submit to arbitration in an employment contract, thereby precluding the employee from joining a class action on any claim covered under the scope of said arbitration agreement. In 2019, the Court took this concept another step in Lamps Plus, Inc. v. Varela by holding that under the FAA, where an arbitration agreement exists, class action is not permitted unless the arbitration agreement specifically permits class claims.
Likely in response to these cases and the failure of prior bills, the drafters of AB 51 included a “savings clause” which states that “[n]othing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act (9 U.S.C. Sec. 1 et seq.).” The effect of this statement is uncertain, in large part because it is difficult to envision how a state law that renders certain mandatory arbitration agreements unenforceable does not conflict with a federal law which is meant to ensure that arbitration agreements are enforced.
Whether or not this clause is ultimately strong enough to wrench AB 51 from the reach of the FAA – and if it does, to what extent – Governor Newsom signed the bill into law, and AB 51 takes effect on January 1, 2020.
Looking Ahead to 2020
Beginning on January 1, 2020, employers operating in California will need to face the uncertainty surrounding AB 51 head-on. In addition to the looming preemption question, AB 51 raises other troubling issues for employers that elect to use arbitration agreements: How do employers ensure arbitration agreements are entered into freely by their employees? Do arbitration agreements currently in place fully comply with the new law? What other changes need to be made to prevent running afoul of AB 51? In order to address these questions and other uncertainties surrounding AB 51, employers with California employees should consult with employment counsel to evaluate their existing arbitration agreements and to assist with any necessary changes thereto prior to January 1, 2020.