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California Bans Employee Arbitration Requirements

New state law may not survive court challenge.

California added to its rapidly expanding list of employer-unfriendly laws enacted this year by adopting a new measure that largely bans arbitration agreements imposed by employers on their employees as a condition of employment.

Gov. Gavin Newsom (D) signed the legislation (called AB 51) into law on Oct. 10. It goes into effect on Jan. 1, 2020.

In doing this, California joins several other states that have enacted similar laws aimed at prohibiting any new mandatory arbitration agreements traditionally used by employers in order to prevent sexual harassment and other claims from becoming mired in litigation.

These states have targeted this kind of arbitration because in some cases the ultimate settlements, and the non-disclosure agreements that often accompany them, are seen as lessening the sting and public embarrassment of sexual harassment claims and hiding the results when harassers are caught out. As a result, these contract clauses became a target in the wake of the #MeToo movement.

Under the new law, employees may bring suit against employers at any time for perceived violations of the California Fair Employment and Housing Act (FEHA) and the state’s Labor Code. AB 51 specifically states that there can be no retaliation brought against anyone who refuses to consent to the waiver of such rights.

Specifically, the law holds that it is 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.

To put teeth in AB 51, it also amends the FEHA to define an employer’s violation of the state Labor Code an unlawful employment practice. In addition to injunctive relief and any other available remedies, a court also may award a prevailing employee enforcing his or her rights under the law reasonable attorney’s fees. To sharpen those teeth, violations of these new sections can be punishable as crimes as well.

It’s not all bad news, however. The law contains certain exceptions seen as limiting the actual scope and application of the ban. For one thing, contract language already in existence before the law becomes effective on Jan. 1 will continue to apply. Also, the law allows some arbitration clauses to be agreed to in the future relinquishing FEHA and Labor Code rights, but only as long as they are entered into as a matter of voluntary consent and no coercion is involved.

The law’s language also explicitly states that nothing contained in it is intended to violate the Federal Arbitration Act (FAA) principle establishing preemption of state laws designed to protect arbitration as a viable alternative to employment litigation. However, some employer attorneys believe the measure may not be able to survive court challenges simply because of that language.

Over the years, the U.S. Supreme Court has upheld the primacy of the FAA preemption, and earlier this year a federal district court in New York also struck down that state’s law prohibiting arbitration in regard to sexual harassment claims.

Parsing the legal language contained in AB 51, attorneys Babak Yousefzadeh and Paul Cowie of the law firm of Sheppard Mullin Richter & Hampton interpret the FAA statement to mean that the law only applies to those arbitration agreements that are not covered by the FAA.

It’s also worth noting that while Newsom signed the law enthusiastically and without caveat, his predecessor, Democratic Gov. Jerry Brown, twice vetoed similar legislation while publicly acknowledging that it would not likely survive a legal challenge.

“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,” Yousefzadeh and Cowie warn. “To hedge against the potential risks flowing from AB 51 taking effect and being enforceable in its entirety, employers with California employees should consult with counsel now on their options.”

They boil down the options available to employers to three actions:

● 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 Jan. 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 state Department of Fair Employment and Housing, the U.S. Equal Employment Opportunity Commission, National Labor Relations Board, U.S. Department of Labor or the California Labor Commissioner from arbitration, or revise the language of your agreement to properly permit the inclusion of such administrative charges.

In the end, AB 51 is just one of dozens of new employment laws passed this year by the California State Legislature, all of which pile on new compliance burdens and potential liability for employers who operate in that state. This particular law is not even the most severe in terms of its impact when compared, for example, to the new law outlawing most independent contractors, but it and the other laws show why many business that are capable of doing so are deciding to flee the Golden State.

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