California’s New Ban on Mandatory Employment Arbitration: How We Got Here and What This Means

All employers should be aware that their use of mandatory employment arbitration agreements is prohibited in California effective January 1, 2020 under recently signed Assembly Bill No. 51 (AB 51).

Under current California law, employers may require employees to waive their right to initiate a civil action, and instead submit most disputes related to their employment in a private forum before a private arbitrator. However, under AB 51, employers are prohibited from mandating arbitration with their employees, or retaliating against employees for declining to sign an arbitration agreement.

The wrinkle here is that the U.S. Supreme Court has repeatedly enforced mandatory employment arbitration agreements under the Federal Arbitration Act (FAA). Thus, AB 51 will likely be challenged in court as preempted by the FAA. Until resolution of that issue, however, employers who use arbitration agreements should review those forms to ensure compliance with AB 51’s requirements.

What Does This Law Mean?

As of January 1, 2020, AB 51 will ban employers from requiring any applicants or existing employees to agree to arbitration “as a condition of employment, continued employment, or the receipt of any employment-related benefit.” In other words, employers will no longer be permitted to mandate arbitration with their employees. Many employers currently utilize mandatory arbitration agreements as a part of their standard onboarding process. In the wake of AB 51, these standard forms will no longer be permissible.

Importantly, the law does not restrict employers from offering arbitration procedures to their employees as an option. If employees voluntarily agree to accept arbitration, they presumably will still be restricted from pursuing class or individual civil actions for their employment-related disputes. Thus, one option for employers is to revise their current arbitration procedures and forms to remove the mandatory component, making clear that the agreement is entirely optional. Of course, employers must exercise caution when doing so, carefully evaluating the risks and benefits for each specific workforce or individual employee. Many employers may choose to limit this practice to contracts with executive employees who are represented by counsel.

AB 51 is silent as to any mandatory arbitration agreements entered into prior to January 1, 2020. Thus, the arbitration protocol employers already have in place now—or might seek to implement prior to year end—seems protected. 

Why Now?

AB 51 was inspired by the #MeToo movement, which created negative publicity for mandatory arbitration agreements and their potential to silence employees who complained of workplace sexual harassment. AB 51 was proposed as a law focused on preventing sexual harassment and increasing employer accountability. The law aims to ensure that any employment contracts that could waive or limit individuals’ rights under the FEHA, are entered into voluntarily, not by coercion.

Although the California legislature has passed similar laws in the past, these initiatives were never enacted. Most recently, in 2018, Governor Jerry Brown vetoed an identical bill, reasoning that it “plainly violate[d] federal law.” With Governor Newsom’s election, however, proponents of a mandatory arbitration ban found a new ally. Newsom commented that the new laws he has signed into effect, including AB 51, aim to give employees “dignity, respect [and] safety . . . ”

Despite being targeted to address sexual harassment claims, AB 51 has much broader implications. AB 51’s prohibition on mandatory arbitration agreements will apply to all types of employment disputes—including other protected claims of discrimination or harassment under the FEHA or wage and hour protections under the Labor Code. This also suggests that mandatory class action waivers, which restrict employees from pursuing class-wide claims and have previously been upheld in California, are now banned.

Key Takeaways

Though AB 51 will undoubtedly face legal challenge over constitutionality or potential federal preemption, in addition to backlash from businesses, employers must be prepared for the change. This law directly impacts all employment contracts or agreements that mention arbitration. Employers should promptly evaluate their current standard forms, and plan to update any mandatory arbitration procedures by the New Year.