A U.S. court of appeals has struck down a landmark California law that prohibits employers from requiring their workers to sign agreements to arbitrate any disputes arising from their employment.
The ruling clears the way for employers to continue using arbitration agreements without risking criminal liability that the law — AB 51 — calls for. The law took effect Jan. 1, 2020, but after a coalition of employers led by the California Chamber of Commerce sued to block the measure’s implementation, a lower-court judge issued a temporary restraining order, halting enforcement until the matter could be resolved by the courts.
Arbitration agreements usually require both the employer and employee to submit any employment-related disputes to arbitration, rather than to the traditional court process. They are designed to reduce tension and save both parties money and time.
The Chamber said the Feb. 15, 2023 ruling by the Ninth U.S. Circuit Court of Appeals invalidating the law was a win for the state’s employers. The business advocacy group had asserted that the law contradicted federal legislation and would result in increased litigation and higher costs for employers and workers alike.
The ruling by the Ninth Circuit upheld a lower court’s preliminary injunction order and holding that AB 51 is preempted by the Federal Arbitration Act (FAA). The court did note, however, that mandatory arbitration provisions may still be invalidated if they are “procedurally and substantively unconscionable, or otherwise unenforceable under generally applicable contract rules.”
What did AB 51 require?
The law made it a criminal misdemeanor for an employer to require an existing employee or a job applicant to sign an arbitration agreement as a condition of employment.
It specifically prohibited employers from requiring employees to waive “any right, forum, or procedure for violation of any provision of the California Fair Employment and Housing Act” or the California Labor Code.
However, due to a quirk in the law, even though an employer could be subject to criminal prosecution if it required employees to sign arbitration agreements, the contracts, if signed, would still be enforceable.
The law was written in this way to avoid conflicting with the FAA. But in the end, the court opined that AB 51 was preempted by the federal law after all.
The takeaway
The Ninth Circuit’s ruling is consistent with decisions by other circuit courts that the FAA preempts state laws or regulations that discourage or bar employers from requiring arbitration agreements.
The ruling paves the way for employers to continue using arbitration agreements with employees in the Golden State. That said, if you are using such agreements or plan to, you should consult with your legal counsel to ensure your agreement is up to date.
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If the case is not appealed, the court’s opinion will likely lead to the law being nullified. But an appeal would be an uphill battle, legal observers say: “SCOTUS (the U.S. Supreme Court) has clearly said that state rules burdening the formation of arbitration agreements are at odds with the FAA,” the law firm of Fisher Phillips wrote in a blog about the ruling.
One important note: The Ninth Circuit’s decision does not affect the federal Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021, which gives employees the right to opt for arbitration agreements and class- or collective-action waivers if they are making sexual assault and sexual harassment claims.