California Employers Can Require Arbitration Agreements as a Condition of Employment

As of February 15, 2023, California employers can require employees to agree to arbitrate most employment disputes as a condition of employment after the Ninth Circuit Court of Appeals, in Chamber of Commerce of the U.S., et al. v. Bonta, et al., held that the Federal Arbitration Act (FAA) preempts California’s Assembly Bill 51 (AB 51).

Background

In October 2019, Governor Newsom signed AB 51, adding Section 432.6 to the California Labor Code. The practical effect of AB 51 was to prohibit employers from requiring an employee or job applicant to sign an arbitration agreement as a condition of employment. The law also imposed criminal penalties on employers, classifying each violation as a misdemeanor subject to imprisonment of up to six months, a fine of up to $1,000, or both. AB 51 applied to contracts for employment entered into, modified, or extended on or after January 1, 2020.

In December 2019, several business organizations (collectively, the “Chamber of Commerce”) challenged AB 51 in court in the Bonta case. The Chamber of Commerce argued that AB 51 treats arbitration agreements differently from other types of contracts and should be preempted by the Federal Arbitration Act (FAA). The District Court issued a preliminary injunction blocking AB 51 from taking effect. The state of California appealed the decision.

The Ninth Circuit Court of Appeals held that the Chamber of Commerce was likely to succeed on the argument that FAA preempts AB 5 to the extent it applied to arbitration agreements and that AB 51’s deterrence of an employer’s willingness to enter into an arbitration agreement was antithetical to the FAA’s liberal federal policy favoring arbitration agreements. Because the FAA’s purpose was to further Congress’s policy of encouraging arbitration, AB 51 was preempted.

What does the Ninth Circuit Court’s Decision Mean for Employers in California?

As a result of the Ninth Circuit’s ruling in February 2023, California employers can require arbitration agreements as a condition of employment. As a practical matter, employers may wish to start using arbitration agreements in their onboarding process for new employees and consider using either mandatory or voluntary arbitration agreements with existing employees. Employers that ceased requiring mandatory arbitration because of AB 51 and the Ninth Circuit’s prior decision should review their existing policies in light of the court’s new decision. However, employers must meet certain legal requirements for such agreements to be enforceable.

What are the Risks of Using Arbitration Agreements with Employees in California?

There are several risks that California employers may face when using arbitration agreements for employees. Here are some of the most significant risks:

  1. Unenforceability: Arbitration agreements in California must meet certain legal requirements to be enforceable. If the agreement is found to be unconscionable or in violation of any other legal requirement, it may be deemed unenforceable, which means that the employer may not be able to compel arbitration in the event of a dispute.
  2. Limited Discovery: Unlike in court, where parties have a broad right to discovery, arbitration proceedings are often more limited in terms of the scope of discovery. When discovery is limited, employers may have difficulties gathering enough evidence to defend against claims made by employees.
  3. Cost: The cost unique to arbitration can be higher than that of litigation. Arbitration costs can be significant for employers, especially in cases involving multiple employees.
  4. Publicity: Arbitration proceedings are usually private, which can be beneficial for employers seeking to keep disputes out of the public eye. However, if an arbitration award is issued against the employer, it may be difficult to keep the details of the dispute confidential.
  5. Limited appeal rights: In general, arbitration awards are final and binding, with limited rights to appeal. This means that employers may not be able to challenge an unfavorable award in the same way that they would in court.

What are the Benefits of Using Arbitration Agreements with Employees in California?

On the other hand, there are benefits to arbitrating employment disputes, including:

  1. Liability. In recent years, California employers have seen a spike in class action and representative lawsuits, particularly for wage and hour claims. The waiting time penalties associated with class claims can result in damages of hundreds of thousands to millions of dollars. Requiring class claims and representative claims to be arbitrated instead of litigated in court may result in less liability for employers.
  2. Privacy. Depending on the provisions of the arbitration agreement, the facts and evidence presented in arbitration is not a matter of public record, which may be advantageous to some employers.
  3. Cost and time. Arbitration may be a faster and less expensive method of resolving an employment dispute.

Employers should weigh the benefits and risks carefully when considering whether to use arbitration agreements for their employees in California. Employers should also consult with legal counsel to ensure that any arbitration agreement is properly drafted and complies with all applicable legal requirements.