United States: AB 51 – Arbitration Under Attack

On October 10, 2019, Governor Newsom signed Assembly Bill 51 (AB 51) into law. This important legislation is aimed at reversing a series of cases that allow employers to unilaterally impose pre-dispute arbitration agreements on their employees as a condition of hire or continued employment. Its stated purpose is to ensure that: (1) all persons have the full benefit of the rights, forums and procedures (rights) established by the California Fair Employment and Housing Act (FEHA) and the state's Labor Code, including the right to file and pursue a civil action or complaint with, or otherwise notify any state agency, public prosecutor, law enforcement agency or court or other governmental entity of, any alleged violation of rights; and (2) there is no retaliation against a person for refusing to consent to the waiver of such rights, and that any contract relating to the relinquishment of those rights is entered into as a matter of voluntary consent, not coercion. The new law goes into effect on January 1, 2020.

AB 51 seeks to accomplish these dual purposes by adding new Section 432.6 to the Labor Code, which makes it unlawful for any person to require a job applicant or any employee to waive FEHA or Labor Code-based rights as a condition of: (a) new or ongoing employment, or (b) receiving any employment-related benefit. Section 432.6 will also make it unlawful for an employer to threaten, retaliate or discriminate against, or terminate any job applicant or employee because they refuse to consent to the waiver of any FEHA or Labor Code-based rights. AB 51 also amends the FEHA to make an employer's violation of Labor Code Section 432.6 an unlawful employment practice. In addition to injunctive relief and any other available remedies, a court may also award a prevailing party enforcing their rights under 432.6 reasonable attorney's fees. Further, violation of these new sections may be punishable as a crime.

It should be noted that AB 51 anticipates, and precludes, the possibility of using "opt outs" from arbitration provisions as a means of making such provisions voluntary. It expressly states that an agreement requiring employees to opt out of a waiver or take any other affirmative action to preserve their rights is still deemed "a condition of employment."

Exceptions

There are several notable exceptions to AB 51. Most significantly, according to the text of Section 432.6(f), it is not intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act (FAA) (discussed further below). Likewise, Section 432.6 does not apply to any of the following:

  1. Contracts for employment entered into, modified or extended prior to January 1, 2020;
  2. Post-dispute settlement agreements or negotiated severance agreements; or
  3. To persons (typically in the securities industry) who are registered with a self-regulatory organization – i.e. a stock exchange, as defined by the Securities Exchange Act of 1934 (SEC) or applicable regulations requiring that covered persons arbitrate disputes that arise between them and their employer.

Advice in Light of AB 51

AB 51 will very likely be challenged in court based on federal preemption principles under the Federal Arbitration Act (FAA) – a law declaring federal policy that written, pre-dispute arbitration agreements in transactions involving commerce (including employment), which require arbitration of controversies between the parties, is valid, irrevocable and enforceable. This federal law requires that such pre-dispute arbitration agreements be enforced according to their terms. Under the FAA, a state may not pass or enforce laws that interfere with, limit, or discriminate against arbitration. To the extent states do pass such laws, the laws are superseded and preempted by the FAA. Because of the FAA, if AB 51 is challenged, it is likely to be declared preempted and, thus, rendered unenforceable. Indeed, it is for this very reason that Governor Newsom's predecessor, Jerry Brown, twice vetoed similar legislation (publicly acknowledging that it would likely not survive a legal challenge). Of course, the outcome of any challenge remains to be seen.

There is also another possible outcome if AB 51 is challenged under federal preemption principles, which leaves the law intact but narrows its scope dramatically such that it only applies where the FAA does not. This possibility comes from a "savings clause" that California legislators included in AB 51. Though AB 51 appears on its face to conflict with the FAA, it contains language that: "Nothing in [Section 432.6] is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act." It is one of the core principles of statutory interpretation that legislators know the law and wish to avoid conflicts between statutes; and so statutes must be read consistently to avoid such conflicts (or to avoid rendering a law unenforceable). If we apply that principle here, and take the California legislature at its word, then there is only one reasonable outcome: that Section 432.6 (i.e., AB 51) only applies to those arbitration agreements not covered by the FAA. In other words, if there are agreements not implicating inter-state commerce, or agreements of employment in the transportation industry (both of which are exempted from the FAA), then the requirements of Section 432.6 would potentially apply. In this way, both statutes would be upheld, but the scope of AB 51 would be reduced to a small fraction of all arbitration agreements.

Of course, there is no guarantee that AB 51 will be challenged, that the challenge will be successful, or that it will be read consistently with the FAA. To hedge against the potential risks flowing from AB 51 taking effect and/or being enforceable in its entirety, employers with California employees should consult with counsel now on their options—these include:

  • Employers without pre-dispute arbitration agreements who may want them, or those who may wish to revise their existing agreements, should implement such changes before the new law takes effect on January 1, 2020;
  • Amend existing arbitration agreements to affirmatively provide that the agreement is covered and governed solely by the FAA (and potentially state the basis for such jurisdiction in the agreement); and
  • Consider excluding administrative charges that employees may file with the DFEH, EEOC, NLRB, DOL or the California Labor Commissioner from arbitration, or revise the language of your agreement to properly permit the inclusion of such administrative charges.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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