Out-of-Court Contracts

The California Legislature has tried for years to stop mandatory arbitration provisions in employment contracts. The Governor or a court has overruled each such effort because of conflict with the Federal Arbitration Act (FAA).

The latest attempt, AB 51, an admittedly attempted end run around the FAA, was to become effective on January 1, 2020, but was stopped by an injunction.

AB 51 inconsistently: (1) prohibited an employer from requiring any employee to waive a right provided under the California Labor Code or Fair Employment and Housing Act (FEHA) (including the right to take claims to court); and (2) made violations a civil and criminal offense; but (3) allowed enforcement of arbitration contracts, even if signed unlawfully.; See What’s New in 2020 California Prohibits Mandatory Employee Arbitration Agreements (December 18, 2019). While AB 51 prohibited waivers of Labor Code and FEHA rights generally, the true target was arbitration clauses.

AB 51’s undoing was that it once again violated the FAA. State laws conflicting with national laws such as the FAA are invalid. “Because the FAA’s purpose is to further Congress’s policy of encouraging arbitration, and AB 51 stands as an obstacle to that purpose,” the federal 9th Circuit Court of Appeals (over California) has now ruled in United States Chamber of Commerce v. Bonta that AB 51 violates the FAA and is preempted.

The court stated that AB 51 “resulted in the oddity that an employer subject to criminal prosecution for requiring an employee to enter into an arbitration agreement could nevertheless enforce that agreement once it was executed.”

California can still ask the full 9th Circuit or the U.S. Supreme Court to review this decision. If one of those courts accepts such a request, stay tuned for the next round.

Employers need to be aware that employees can still challenge arbitration agreements on general contract principles, such as threats, physical coercion, heavily one-sided terms (called “unconscionability”). However, statutes may not penalize employers for the mere act of entering into such an agreement or enforcing a valid one.

Take-Aways: The subject of mandatory arbitration in employment agreements has been on a roller coaster in California for many years. The safest practice dictates consulting knowledgeable employment counsel who stay up-to-date on the latest requirements for employment arbitration agreements and can advise accordingly.

For further information, please contact Tim Bowles, Cindy Bamforth or Helena Kobrin.

See also:
Cautionary Tale Episode 53 Poetic Justice Smack Down – Reconsidering Arbitration Agreements (April 6, 2022)
Their Day in Court – Sexual Harassment Accusers May Opt Out of Forced Arbitration (March 11, 2022)
The Right to Fight – Battle Continues Over Employer-Required Arbitration Agreements (September 24, 2021)
The Need for Written Employer Agreements – Well-Drafted Contracts Eliminate Uncertainty and Ambiguity (March 30, 2018)

Helena Kobrin
February 24, 2023