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California Employers Should Reconsider Imposing Mandatory Arbitration as a Condition of Employment

On September 15, 2021, in Chamber of Commerce of the United States of America, et al. v. Rob Bonta, the Ninth Circuit Court of Appeals partially vacated the lower court’s injunction against enforcement of California Assembly Bill 51 (“AB 51”), holding, in pertinent part, that AB 51 is not preempted by the Federal Arbitration Act (“FAA”).  Thus, at least for now, employers should be wary of requiring employees to enter into arbitration agreements as a condition of employment.

It should be noted that the Ninth Circuit’s decision will not immediately take effect.  The injunction will remain in place until the Ninth Circuit issues its mandate and the case is remanded back to the district court to make factual findings and decide the case on the merits.

It should be further noted that the law does not prohibit employers from requesting employees to voluntarily sign arbitration agreements, only that the agreement is not presented as a condition of employment.  Employers are urged to immediately review their employment arbitration agreements and practices and consider halting use of mandatory arbitration agreements upon hire (i.e., as a condition of employment) at this time.

Contact PB&W Attorneys for Guidance

We will continue to monitor future developments of this case very closely and issue updated changes in the law accordingly. We suspect the decision will be appealed, and possibly even be taken up by the Supreme Court.

If you have any questions related to compliance, or are in need of further guidance regarding arbitration agreements generally, please contact Pearlman, Brown & Wax’s Employment Law department for assistance at (818) 501-4343 or http://pbw-law.com/areas-of-law/employment-law-litigation.html

Case Background

In October 2019, California enacted AB 51, which prohibits employers from requiring mandatory arbitration agreements as a condition of employment, continued employment, or receipt of employment-related benefits for claims arising under California’s Labor Code or California’s Fair Employment and Housing Act.  The law was set to become enforceable beginning January 1, 2020.

In December 2019, a coalition of business groups (i.e., Plaintiffs) sued the State of California.  Plaintiffs argued that Supreme Court precedent makes it clear that the FAA preempts laws like AB 51.  Plaintiffs also argued that they would suffer irreparable harm if AB 51 was permitted to take effect because refusal to comply would expose them to criminal and civil penalties and lawsuits under the law.  Plaintiffs further argued that AB 51 would require employers to alter their relationships with their workers and incur significant costs. In response, U.S. District Court Judge Kimberly J. Mueller agreed with Plaintiffs’ position and issued a preliminary injunction against enforcement of AB 51 on the grounds that it was likely preempted by the FAA. The State of California appealed.

The issue before the Ninth Circuit was whether Section 2 of the FAA, which provides that a written agreement to arbitration “shall be valid, irrevocable, and enforceable,” preempts (1) the portions of AB 51 that restrict the formation of arbitration agreements between employers and prospective employees; and (2) the civil and criminal sanctions it imposed on employers for violating its restrictions.

In a 2-1 split decision, the Ninth Circuit concluded that because AB 51’s restrictions prohibiting mandatory arbitration agreements with respect to employment-related claims limit the formation of arbitration agreements rather than invalidating existing arbitration agreements, AB 51 does not directly conflict with the FAA.  The Court stated: “[N]othing in [the FAA] grants an employer the right to force arbitration agreements on unwilling employees.  The only ‘federally protected right’ conferred by the FAA is the right to have consensual agreements to arbitration enforced according to their terms.”

The Ninth Circuit did, however, agree with the district court that the civil and criminal penalties associated with AB 51 for the act of executing an arbitration agreement conflicted with the FAA and thus were preempted to the extent they applied to executed arbitration agreements covered by the FAA.

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