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California Tries to Ban Employment Arbitration (Again), Makes a Big Mess

by D. Gregory Valenza | | Oc

The Governor of California is furiously signing hundreds of bills before the deadline.  Many will require employers’ attention. Fortunately, our Firm will do its annual legal update (live and via webinar) to help you make sense of it all. If you’re not signed up, you can do so here.  Yeah, it’s a plug, but you’ll be sorry if you miss it.  

 AB 51 is one of those bills you need to know. AB 51 not only is a sneaky attempt to ban arbitration, but also it does more than that.   The text of the bill is here. 

Unlike former Governor Brown, who vetoed a ban on employment arbitration agreements because he knew they were preempted by federal law, Governor Newsom will not be deterred. And maybe the Legislature and anti-arbitration forces have finally come up with a way… We shall see what the federal courts have to say. 

AB 51 amends the Fair Employment and Housing Act by making it an “unlawful employment practice” to violate (new) Labor Code section 432.6.  That means violating section 432.6 is just as illegal under the Fair Employment and Housing Act as sexual harassment, discrimination, and the other unlawful employment practices.  As a result, an employer that violates section 432.6 may be sued for the damages and other remedies – including punitive damages – and attorney’s fees, available under FEHA.  

So, how does one violate Labor Code section 432.6, and therefore FEHA, you may ask?  

Well, first, the law contains a general statement, and then there are a bunch of carve-outs. The general statement provides that it’s unlawful to require 

any applicant for employment or any employee to waive any right, forum, or procedure for a violation of any provision of the California Fair Employment and Housing Act **** or this [Labor] code, including the right to file and pursue a civil action or a complaint with, or otherwise notify, any state agency, other public prosecutor, law enforcement agency, or any court or other governmental entity of any alleged violation.

So this is broad. This bans not only arbitration agreements, but also severance / release agreements, or any other contract that would limit the “right” to sue, sue in court, or file a charge at the DFEH or DLSE.  And remember, this law applies not only to FEHA, but also to the Labor Code.  

This law also prohibits an employer from refusing to hire or discharging an applicant or employee who does not agree to an arbitration agreement, or who refuses to sign a release. 

An employer shall not threaten, retaliate or discriminate against, or terminate any applicant for employment or any employee because of the refusal to consent to the waiver of any right, forum, or procedure for a violation of the California Fair Employment and Housing Act or this [Labor] code, including the right to file and pursue a civil action or a complaint with, or otherwise notify, any state agency, other public prosecutor, law enforcement agency, or any court or other governmental entity of any alleged violation.

OK, but like I said, there are exceptions to the law. 

  1.  The law states it does not “invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act (9 U.S.C. Sec. 1 et seq.”   That’s interesting.  On the one hand, it looks like the law says that an arbitration agreement is valid and enforceable as long as it’s enforceable under the Federal Arbitration Act.  Nevertheless, the law also says it’s illegal under FEHA to require the arbitration agreement as a condition of employment. So, is it possible that an employee signs an arbitration agreement, but still has a claim for violation of FEHA based on the employer’s insistence on arbitration?  We shall see.  Also, will employers be able to come up with arbitration agreements that are sufficiently voluntary to pass muster under section 432.6?  Maybe an opt-out provision, making arbitration voluntary, or providing some consideration like an arbitration-signing bonus?  We shall see that too.
  2. The law exempts arbitration agreements required by federal securities law “self-regulatory agencies” presumably like the NASD.  Employers in that industry need not worry about arbitration agreements violating California law.  Whew. 
  3. The statute also says “This section does not apply to postdispute settlement agreements or negotiated severance agreements.”  What does it mean to be “post-dispute” or “negotiated”?  Because if it’s not “post-dispute” or “negotiated” a release of provisions under the Labor Code or FEHA is invalid under this law. 
  4. As stated above, the law says it does not “invalidate” any arbitration agreement that is subject to the Federal Arbitration Act.  What about arbitration agreements that are not subject to the FAA (like transportation workers’ arbitration agreements, for example?).  Do the California Arbitration Act and all the California case law upholding arbitration agreements still apply?  Of course if the FAA does not apply, Labor Code section 229 already precludes arbitration of Labor Code claims.  
  5. Finally, the law applies only to “contracts for employment entered into, modified, or extended on or after January 1, 2020.”  So, any arbitration agreement that pre-dates 1/1/20 is just as valid as if this new law did not exist.  Get your arbitration agreements in early.

Will this law be preempted by the Federal Arbitration Act?  It looks like the Legislature is trying to get around preemption by allowing arbitration agreements themselves to exist and be enforceable, but allow employees with enforceable arbitration agreements to bring claims under FEHA or PAGA because they have enforceable arbitration agreements.  The law plainly targets arbitration agreements. The Legislative history says so.  But will that be enough to invalidate the law, even though the law expressly says that the arbitration agreements themselves are valid, even though they are illegal practices under FEHA?  Stay tuned.

And like I said, AB 51 is about more than arbitration. Separation agreements and releases of wage and hour claims or discrimination claims must be drafted with AB 51 in mind.  “Severance” agreements releasing Labor Code or FEHA claims are OK if they are “negotiated.”  “Settlement” agreements are OK, if they are “post dispute.”  So, draft accordingly and update those templates. 

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