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On October 10, 2019, Governor Gavin Newsom signed Assembly Bill 51 (“AB-51”) into law. AB-51 makes it unlawful for employers to require current or prospective employees to agree to arbitration for claims brought under California laws. The law added Section 432.6 to the California Labor Code and Section 12953 to the California Government Code.
Essentially, AB-51 bans the mandatory arbitration of Fair Employment Housing Act (“FEHA”), and California Labor Code claims. Section 432.6 makes it unlawful for an employer to threaten, retaliate, discriminate against, or terminate any job applicant or employee because he or she refuses to consent to the waiver of any FEHA or Labor Code-based rights. Additionally, California Government Code Section 12953 makes any violation of Labor Code Section 432.6, an unlawful employment practice. Violations of these statutes are tantamount to a criminal misdemeanor, punishable by imprisonment, a fine, or both. Further, applicants and employees seeking to enforce their rights under AB-51, based on discrimination or retaliation for declining arbitration, are entitled to injunctive relief, damages, and attorney’s fees.
Under AB-51, arbitration is considered mandatory when presented to a current or prospective employee as a condition of employment, continued employment, or the receipt of any employment-related benefit. However, the bill, does not prevent parties from entering into voluntary arbitration agreements, and thus one might consider implementing an opt-out provision. In theory, the use of an opt-out provision provides the argument that waiver of a forum is not a condition of employment. Yet, AB-51 prohibits arbitration agreements with “opt-out” provisions. Arbitration agreements that allow employees to “opt-out of a waiver or take any affirmative action to preserve their rights” impose a condition of employment. Meaning, voluntary opt-out procedures are treated as involuntary and, therefore, violate section 432.6.
Initially, AB-51 was scheduled to go into effect on January 1, 2020, but on December 30, 2019, a judge from the Eastern District of California issued a temporary restraining order, blocking the enforcement of AB-51. The bill was found to conflict with the Federal Arbitration Act’s general purpose and objectives of promoting arbitration agreements’ use and validity. By contrast, AB51 limits the formation of arbitration agreements.
For an arbitration agreement to be valid, the employer must give the employee “consideration” in exchange for the employee’s agreement to waive access to the courts. Consideration is a benefit that must be bargained for between the parties and is the fundamental reason for a party entering into a contract. When an employee is a new hire, employment likely will serve as adequate consideration. Additionally, giving an employee a raise, a bonus, or additional vacation days would probably satisfy this requirement. However, AB-51 makes it a crime for an employer to inform an employee that his or her continued employment is conditioned upon agreement to arbitrate any and all disputes arising out of his or her employment or the termination thereof.
As a practical matter, the order enjoining the enforcement of AB-51 means that employers can validly enter into arbitration agreements with their employees for the time being. It is important to note that the Eastern District’s ruling applies only to employment contracts governed by the Federal Arbitration Act. The Federal Arbitration Act applies to agreements that involve interstate commerce, meaning buying, selling, or moving of products, services, or money across state borders.
The Federal Arbitration Act probably does not apply to a California employment contract between a California business and a California resident doing work in California only so that the order enjoining enforcement of AB-51 may not apply unless the California employer is doing work across state borders. There is a bit of uncertainty about whether if AB-51 is invalidated, it will be invalidated altogether or only as it applies to contracts covered by the Federal Arbitration Act. The risks to the California employer include criminal and civil liability. The safest approach for California employers who only do business in California is to avoid entering into new arbitration agreements with employees. Additionally, as AB-51 does not prevent parties from entering into voluntary arbitration agreements, employers may consider implementing voluntary arbitration provisions. Employers considering the latter should consult with an attorney before entering into new contracts to arbitrate with employees or prospective employees.