Alert 02.10.23
Employment Law in the Golden State: 2023 Updates
A number of recent case law and regulatory updates—at both the state and federal levels—carry important implications for California employers in the upcoming year.
Alert
Alert
02.22.23
In 2019, California enacted Assembly Bill 51 (AB 51) which made it a criminal offense for an employer to require an employee or applicant to consent to arbitration as a condition of employment. In an effort to avoid preemption under the Federal Arbitration Act (FAA), an Act which bars states from treating arbitration agreements differently than other contracts, AB 51 included a provision stating that if the parties mutually entered into an arbitration agreement, it would be enforceable. Thus, an employer could be subject to criminal prosecution for requiring an employee to enter into an arbitration agreement, but if the employee signed the arbitration agreement, it would be enforced.
Shortly after AB 51 became effective, a district court granted a motion enjoining enforcement of it, ruling that the business groups challenging it would likely prevail on their argument that the FAA preempts AB 51 because it “conflicts with the purposes and objections of the FAA.” To the surprise of many, in September 2021 the Ninth Circuit partially reversed the district court, and vacated the preliminary injunction, holding in that AB 51 was enforceable to the extent it mandated that agreements to arbitrate be “consensual” and mandatory arbitration agreements that were a condition of employment, may not be consensual. However, while a motion to have the decision reconsidered en banc was pending, the Ninth Circuit withdrew the opinion, stating it would rehear the matter after the U.S. Supreme Court issued its decision in Viking River Cruises v. Moriana. In the Viking River case decided in June 2022, the Supreme Court once again demonstrated its expansive view of FAA preemption and held that FAA preempted state court decisions barring mandatory arbitration of claims under the California Private Attorney General Act (PAGA).
AB 51 Burdens the Formation of Arbitration Agreements and Thus Is Preempted by the FAA
In blocking the enforcement of AB 51 in the recent Chamber of Commerce v. Bonta case, the Ninth Circuit recognized the Supreme Court rulings “place it beyond dispute that the FAA was designed to promote arbitration,” and the FAA embodies a “national policy favoring arbitration.” It also found that the Supreme Court had made clear that FAA preemption was not limited to state rules affecting enforceability; it also preempted state laws that “discriminate against the formation of arbitration agreements.” The Court held that AB 51’s scheme of making it a criminal offense if an employer required an employee or applicant to consent to arbitrate claims as a condition of employment, discriminated against the formation of arbitration agreements.
The Ninth Circuit rejected the argument that AB 51’s attempt to prevent formation of arbitration agreements that are a mandatory condition of employment should not be preempted because “arbitration is a matter of contract and agreements to arbitrate must be voluntary and consensual”—the argument the same Ninth Circuit panel found persuasive in 2021. The Court here recognized that employment contracts often include nonnegotiable terms, and this is allowed under California law. An agreement may be “consensual” even if one party accepts a term he or she dislikes due to unequal bargaining power. The Court held that AB 51 was not simply an assurance that employees will not be compelled to arbitrate claims against their will; it interfered with the party’s ability to agree to arbitration, and “thus creates a scheme inconsistent with the FAA.”
What is Next for AB 51?
While California could seek a rehearing by the Ninth Circuit en banc, it is unlikely that such a hearing would be granted, and the decision overturned. As demonstrated by the Ninth Circuit panel’s reversal of its earlier decision, the U.S. Supreme Court’s consistent rulings as to the expansive nature of FAA preemption, most recently in the Viking River case, make it difficult for the Ninth Circuit to uphold AB 51.
How This Impacts California Employers
Prior to this ruling, many employers continued to include arbitration agreements as part of their offers of employment but made the agreement to arbitrate voluntary. Now California employers can again require arbitration as a condition of employment for new hires.
The same is true of current employees; an employer can, in theory, insist that employees agree to a mutual arbitration agreement as a condition of continued at-will employment. However, there are difficult issues and risks that may arise from such a mandate, most notably how should an employer respond if a long-term employee refuses to sign the mandatory arbitration agreement.
In addition, there remain certain claims that cannot be subject to mandatory arbitration, such as sexual harassment claims, and agreements to arbitrate may be invalid due to unconscionability or other generally applicable contract principles. Agreements to arbitrate continue to be attacked on these grounds on a regular basis, so care must be taken when drafting such agreements consistent with these most recent rulings.
Finally, although many California employers believe that arbitration is the best way to resolve employment-related disputes, arbitration may not necessarily be the right forum for all employers, due to its costs, a diminished ability to resolve disputes through motion practice, and extremely limited appeal rights. However, the Ninth Circuit’s decision to uphold the preliminary injunction restraining enforcement of AB 51 creates a timely opportunity for California employers to consider whether a mandatory arbitration policy is appropriate for their workforce.