New California Law Bans Mandatory Arbitration for Most Workplace Claims

Effective Jan. 1, 2020, California employers can no longer require workers to arbitrate state-law discrimination and labor code claims, under a bill that Gov. Gavin Newsom recently signed. But employment attorneys expect the new mandate to be challenged under a federal law that favors arbitration. 

Inspired by the #MeToo movement, AB 51 is meant to prevent businesses from silencing workers who have experienced discrimination and colleagues who have witnessed the misconduct. The new law "will protect vulnerable workers from being forced to waive their rights, and it will prohibit employers from threatening, retaliating [or] discriminating against, or terminating workers because they refuse to consent to such a waiver," according to a press statement from Assemblywoman Lorena Gonzalez, D-San Diego, the bill's author.

Opponents of the new law, however, say that arbitration agreements benefit employers and employees alike. The Society for Human Resource Management (SHRM) urged Newsom to veto the legislation. SHRM supports public-policy proposals that promote an accessible, prompt and fair resolution of harassment claims in the workplace while protecting confidentiality and due process.

"In certain circumstances, arbitration can be advantageous to an employee since the process is less expensive, less formal and quicker … than litigation," SHRM stated in a letter to Newsom. "AB 51 will only add unwarranted time and expense to the dispute process for employers and employees, thus delaying resolution of the issue."

Possible Federal Pre-Emption

The new California law may be invalid under federal law. The U.S. Supreme Court has held that state laws that treat arbitration agreements less favorably than other contracts are pre-empted by the Federal Arbitration Act (FAA). And former California Gov. Jerry Brown vetoed similar bills in the past, citing concerns about federal pre-emption.

Business groups will likely fight AB 51. "Legal challenges are inevitable and will likely require years of litigation before a final resolution," said Benjamin Ebbink, an attorney with Fisher Phillips in Sacramento, and James McDonald Jr., SHRM-SCP, an attorney with Fisher Phillips in Irvine. "We could see it scaled back or completely tossed out before ever being enforced, based on an argument that it is pre-empted by federal law."

Employers in California—and elsewhere—should review their arbitration agreements to ensure their validity under the FAA and consider their options in light of California's new law and the FAA pre-emption litigation that is bound to ensue, said Scott Jang, an attorney with Jackson Lewis in San Francisco, and Samia Kirmani, an attorney with Jackson Lewis in Boston.

Broad Coverage

"While AB 51 was pitched as a bill [to prevent sexual harassment] and was inextricably linked by supporters to the #MeToo movement, the new law is actually much broader and covers much more than just sexual harassment," Ebbink and McDonald explained.

Under the new law, employers can't require job applicants or employees to waive any workplace rights under the California Fair Employment and Housing Act (FEHA) or the state labor code as a condition of employment or continued employment or to receive benefits. Workers can't be required to bring claims in a certain forum—such as an arbitration proceeding instead of a court—and employers will face legal consequences for threatening, retaliating or discriminating against or firing a worker who refuses to waive such rights.

[SHRM members-only HR Q&A: What is FEHA and what does it cover?]

The law "makes clear that even voluntary opt-out clauses in mandatory arbitration agreements will not be enough to escape the new law's restrictions," Jang and Kirmani noted.

Employer Takeaways

In addition to possible federal pre-emption issues, the new law has limited application. For instance, the mandatory arbitration ban will apply only to contracts that are "entered into, modified or extended" on or after Jan. 1, 2020. "Thus, arbitration agreements already in existence appear to enjoy the benefit of a grandfather provision," Jang and Kirmani said.

Additionally, the new law states that it won't invalidate a written arbitration agreement that is otherwise enforceable under the FAA. Jang and Kirmani noted that most arbitration agreements are enforceable under the FAA.

The U.S. Supreme Court may ultimately need to resolve the issue. Some employers may choose to continue including these provisions in employment contracts while the anticipated litigation is pending. "The thought process behind this strategy is that even if AB 51 is upheld, any unlawful contract provisions will simply be void and unenforceable," Ebbink and McDonald said. However, they noted that an employee who successfully challenges an alleged violation of the new law may be entitled to collect attorney fees from the employer.

Furthermore, many employers probably don't want to be the test case to challenge the new law all the way to the Supreme Court, they added. "Therefore, you should soon have a conversation with competent employment counsel to discuss these nuanced issues."