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AB-51: PROHIBITING MANDATORY ARBITRATION AGREEMENTS…OR NOT

| Dec 17, 2019 | Arbitration Agreements |

Arbitration agreements are a valuable tool to employees and employers in California, allowing for a quick, efficient, and cost-effective mechanism to resolve their workplace disputes. Employers may even stave off the dreaded class action lawsuit by implementing valid, properly worded arbitration agreements with their workforce.

Many employers seek to take advantage of the various benefits of private arbitration by implementing arbitration agreements, either on a voluntary basis or as a condition of employment.

However, the use of arbitration agreements in the workplace is under attack by the California legislature. On October 10, 2019, Governor Newsom signed into law AB-51, which may have significant ramifications for employers doing business in California.

What is the New Law and When Does it Take Effect?

The new law is AB-51, which will take effect on January 1, 2020.

What Does the New Law Purport to Do?

There are several aspects to AB-51.

First, AB-51 adds section 12953 to the Government Code, which makes it “an unlawful employment practice for an employer to violate Section 432.6 of the Labor Code.”

Second, AB-51 adds section 432.6 to the Labor Code. In short, Labor Code section 432.6 purportedly bans employers from requiring as a condition of employment an employee to waive any right to proceed in a specified forum (i.e. a court of law) for claims arising under the California Fair Employment and Housing Act (“FEHA”) or the Labor Code as a condition of employment, continued employment, or the receipt of any employment-related benefit. In other words, mandatory arbitration agreements are seemingly illegal under the law for contracts of employment entered into, modified, or extended on or after January 1, 2020, unless the arbitration agreements contain a carve-out for claims arising under FEHA and the Labor Code.

Does the New Law Really Ban Mandatory Arbitration Agreements?

No, at least for those arbitration agreements that are enforceable under the Federal Arbitration Act.

While Labor Code 432.6(a) purports to ban employers from implementing mandatory arbitration agreements, there is an important carve-out for arbitration agreements entered into under the Federal Arbitration Act. Specifically, Labor Code 432.6(f) provides: “Nothing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act (9 U.S.C. Sec. 1 et seq.)” In other words, arbitration agreements entered into under and governed by the FAA that are valid (i.e. not unconscionable, etc.) are likely still enforceable even if entered into on or after January 1, 2020, notwithstanding the newly enacted Labor Code section 432.6.

My Arbitration Agreement Contains an “Opt-Out” – Does this Mean That the Arbitration Agreement is Not “Mandatory,” and Therefore Enforceable?

No. An “opt-out” in an arbitration agreement likely does not convert the arbitration agreement from mandatory to voluntary. If an employer requires its employees to sign the arbitration agreement, a court will likely consider the employee’s execution thereof “mandatory,” notwithstanding the ability of the employee to “opt-out” of the arbitration agreement after executing it.

Why Include an Opt-Out if it Does Not Make the Arbitration Agreement “Voluntary?”

The opt-out language our attorneys commonly use in preparing arbitration agreements is not used for purposes of demonstrating the agreement is “voluntary,” but instead used to demonstrate that the arbitration agreement is not procedurally unconscionable, which is critically important when attempting to enforce arbitration agreements.

Generally, a common defense asserted by plaintiff’s counsel when defending against a petition to compel arbitration is to claim that the arbitration agreement is unconscionable, which requires proving up both procedural and substantive unconscionability. In order to prove procedural unconscionability, plaintiff’s counsel typically argues that the arbitration agreement at issue is a “contract of adhesion,” i.e. a standard form agreement presented on a take it or leave it basis to an employee. A contract of adhesion is necessarily procedurally unconscionable, at least to a certain extent, under California law.

By including opt-out language in arbitration agreements, an employer can potentially avoid a finding that the arbitration agreement at issue is a contract of adhesion, or more broadly, a finding that the agreement is procedurally unconscionable. By giving the employee the opportunity to opt-out, a court may infer an element of fairness and voluntariness on the part of the employee, which it may not infer absent an opt-out provision.

If your company has concerns about how AB-51 could impact your business operations, contact one of the attorneys at Sagaser, Watkins & Wieland PC for assistance. Our team of lawyers has an abundance of experience in drafting and implementing arbitration agreements. We can work with your Company to ensure enforceable arbitration agreements are in place.

Please contact our office at (559) 421-7000 if you are concerned about AB-51’s potential impact on your business operations.