Governor Gavin Newsom recently signed Assembly Bill 51 (“AB 51”) into law new rules that will prohibit California employers from requiring employees to sign arbitration agreements as a condition of employment. AB 51 is set to take effect January 1, 2020, but it faces an uncertain future. If the law goes into effect in its current form, it will remove a significant risk management tool from an employer’s arsenal.

Background

California is one of a number of states seeking to ban employers from forcing employees to arbitrate employment claims. In recent years, however, the United States Supreme Court has issued a series of decisions rejecting such state law restrictions on arbitration of employment claims. Despite the pushback from federal courts, with AB 51, California has not only prohibited, but criminalized, requiring employees to arbitrate claims as a condition of employment. This type of aggressive anti-arbitration legislation raises many questions, including whether it is unconstitutional.

What AB 51 Requires of California Employees

On its face, AB 51 adds new teeth to the California Labor Code, imposing several restrictions on “contracts for employment entered into, modified, or extended on or after January 1, 2020.

The new law precludes “a person” from requiring any applicant or employee, as a condition of employment, continued employment, or the receipt of any employment-related benefit, “to waive any right, forum, or procedure” for a violation of the Fair Employment and Housing Act (FEHA) or the Labor Code. The law also prohibits “an employer” from threatening, retaliating or discriminating against, or terminating any applicant or employee who refuses to consent to the waiver of “any right, forum, or procedure” for a violation of the FEHA or the Labor Code. It also entitles a successful plaintiff to obtain injunctive relief and attorney’s fees. Violations of AB 51 also constitute crimes.

AB 51 carves out a handful of exceptions, where arbitration agreements are permissible, including in settlement and severance agreements.

Will AB 51 survive?

Just last year, former Governor Brown vetoed AB 3080—a bill nearly identical to AB 51—because it disregarded the Federal Arbitration Act, which has been a hot button consideration when California law is scrutinized by the United States Supreme Court. AB 51, however, includes a crafty if superficial provision intended to avoid violating federal law: “Nothing 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.).”
Despite this, AB 51 may be blocked by a court before it takes effect. Similar attempts at restricting arbitration have failed for violating the federal law favoring arbitration–a trend likely to continue with the current conservative/pro-employer agenda of the Trump administration and current make-up of the United States Supreme Court.


Is AB 51 Retroactive? Don’t Abandon Your Arbitration Agreements Just Yet

Absent a court order enjoining implementation of the legislation, California employers with ongoing arbitration programs (or those interested in enacting arbitration programs in 2019) have decisions to make. Employers should consider these options carefully.

AB 51 does not apply retroactively to existing arbitration agreements. However, AB 51 will apply to arbitration agreements modified or extended after January 1, 2020. Before this deadline, employers are urged to drop language in any employment relationship signaling that arbitration is not voluntary, or makes arbitration a condition of employment.

What to Do Moving Forward?

An employer can choose to maintain its existing arbitration policy, in expectation that the AB 51 will be held to be preempted by federal law, or because it is enforceable under the FAA. However, both involve much uncertainty. And any person who participates in the administration of any policy that violates AB 51 nevertheless faces risk of misdemeanor liability. What should California employers do?

Given AB 51’s focus on FEHA and Labor Code claims, an employer could proceed with a narrow arbitration program limited to other claims, such as breach of contract or tort claims. Such an approach may have a valuable deterrent effect on all possible claims. But, this approach is also not without its drawbacks, because parallel claims might proceed simultaneously in court and in arbitration, thereby increasing costs and complexity. For example, a claim for wrongful termination in violation of public policy alleging discrimination could proceed in arbitration, while the statutory claim under FEHA could proceed in court.

While the law in this area rests on unsettled ground, the safest path for employers appears to be to offer a standalone arbitration agreement to employees, with strong language emphasizing that the agreement is voluntary, and to do so before 2020. Additionally, employers should provide separate consideration in exchange for agreeing to arbitrate claims. What constitutes adequate consideration should be discussed with your HR advisors and corporate counsel, though it will likely need to be financial in nature.

We expect to see a challenge to this new law any day. In the meantime, California employers must prepare for the worst and decide how to comply with AB 51. The particular path chosen by an employer will depend on each employer’s specific circumstances, assessment of the risks and benefits, and the guidance of employment counsel. Again: California employers without arbitration agreements with their employees should be taking speedy steps to do so before the January 1, 2020 effective date.

For more information or a review of your current policy, please contact DDWK.

Teagan Dow is an employment attorney focusing on employment consulting, HR and risk management. Teagan can be reached at tdow@ddwklaw.com.

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