Changing Messages from Courts on AB 51: Now Employers Cannot Require Arbitration Agreements

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For those employers who have been following the evolving history of Assembly Bill 51 (“AB 51”), which regulates California employers’ ability to have agreements to arbitrate any disputes with their prospective or hired employees, there is a new twist:  In a September 15, 2021 decision, Chamber of Commerce of the U.S., et al. v. Bonta, et al., Case No. 20-15291, the Ninth Circuit Court of Appeal reversed a District Court decision to conclude that the Federal Arbitration Act (“FAA”) did not preempt California AB 51’s ban on employment conditioned upon mandatory arbitration agreements. As explained below, this Ninth Circuit ruling may soon have a substantial impact on employers’ arbitration policies going forward.

In 2019, California passed AB 51, which added section 432.6 to the California Labor Code and section 12953 to the California Government Code to generally prohibit employers from requiring applicants or employees to agree to arbitrate as a condition of employment. AB 51 made it illegal for an employer to require applicants or employees, as a condition of employment, continued employment, or the receipt of any employment-related benefit, to waive any rights, forum, or procedure established by the California Fair Employment and Housing Act (“FEHA”) and the California Labor Code. The Conkle firm has written previously about the potential effects of AB 51.

AB 51 had been set to take effect on January 1, 2020, but on December 30, 2019, U.S. District Court Judge Kimberly Mueller issued a preliminary injunction, preventing AB51 from taking effect. Judge Mueller concluded that “AB 51 placed agreements to arbitrate on unequal footing with other contracts and also that it stood as an obstacle to the purposes and objectives of the FAA.” Bonta, No. 20-15291 at 12. In other words, Judge Mueller decided that AB 51 discriminated against arbitration agreements in a manner that is prohibited by the superseding federal law of arbitrations, the FAA.

California appealed Judge Mueller’s ruling.  On September 15, 2021, the U.S. Court of Appeals for the Ninth Circuit issued a split (2-1) decision partially reversing the District Court’s order. The Ninth Circuit held that the FAA did not preempt AB 51 with respect to its prevention of conditioning employment on the signing of an arbitration agreement. On this basis, the Ninth Circuit vacated the preliminary injunction that had stopped AB 51’s enforcement, so at present there is nothing stopping AB 51 from taking effect very soon.

For employers, this means that, unless there are further decisions by the Ninth Circuit or the United States Supreme Court, AB 51’s mandate that employers cannot condition employment or continued employment on the signing of an arbitration agreement will shortly go into effect. However, employers should be aware that AB 51 does not apply retroactively, which means that arbitration agreements previously signed by employers before AB 51 can still be enforced.  ([Proposed] Labor Code §432(f).)

A common question Conkle, Kremer & Engel attorneys are receiving is whether, even under AB 51, an employer is allowed to request that employees or prospective employees sign an arbitration agreement. The answer is yes. However, because the Ninth Circuit’s decision is somewhat muddled on this point, there is no clear answer to the natural follow up question, “What can I do if the employee refuses?”

The Ninth Circuit reasoned that the enforcement provisions of AB 51 are preempted “to the extent that they apply to executed arbitration agreements covered by the FAA.” Bonta, No. 20-15291 at 29. The dissent in Bonta attacks the majority’s reasoning as illogical:

In case the effect of this novel holding is not clear, it means that if the employer offers an arbitration agreement to the prospective employee as a condition of employment, and the prospective employee executes the agreement, the employer may not be held civilly or criminally liable. But if the prospective employee refuses to sign, then the FAA does not preempt civil and criminal liability for the employer under AB 51’s provisions.

Bonta, No. 20-15291 at 47. As the dissent argues, the majority’s reasoning could result in liability to the employer where the employer fails while attempting to engage in the prohibited conduct of forcing an employee or prospective employee to sign an arbitration agreement, but the employer would not have liability when the employer succeeds in engaging in that same prohibited conduct.

What does this ultimately mean for employers? We expect the Ninth Circuit’s ruling to be challenged by a request for an en banc review by a larger panel of the Ninth Circuit’s justices, or by a writ to the U.S. Supreme Court (which has recently been quite hostile to Ninth Circuit rulings that it has chosen to review).  Such a challenge could result in yet another “stay” that would effectively restore the injunction issued by Judge Mueller and preclude AB 51 from taking effect. However, unless a stay is issued, AB 51 is set to go into effect in the near future.

While much uncertainty remains as a result of the Ninth Circuit’s ruling, AB 51 will increase potential liability for employers that condition employment on arbitration agreements, as well as provide more power to employees who do not wish to arbitrate. Employers that currently have policies conditioning employment or continued employment on the signing of an arbitration agreement should continue to monitor the status of AB 51, should prepare for the possibility that it will not be able to require arbitration agreements going forward and should reevaluate the benefits and risks related to conditioning employment on the signing of an arbitration agreement.

CK&E attorneys keep updated on developments in the law that affect employers in California, including their rights to arbitrate disputes with applicants and employees.  Stay tuned for additional developments in this saga of AB 51.

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AB 51 at a Crossroad: Can California Employers Still Compel Employees to Arbitrate Disputes?

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California Assembly Bill 51 (“AB 51”) has been in the news because it imposes a far-reaching ban on California employers requiring employees to arbitrate employment disputes. AB 51 was set to take effect on January 1, 2020, but its effect was temporarily stopped by a court injunction issued by U.S. District Judge Kimberly Mueller on December 30, 2019, in a lawsuit filed by the U.S. and California Chambers of Commerce. A fuller hearing on whether the court will extend the injunction is set for January 10, 2020. If the injunction is extended, AB 51 will remain in limbo as long as that case remains pending, and very possibly permanently.

AB 51, if it is allowed to take effect, would have far-reaching implications for California employers who use arbitration agreements for resolution of disputes with employees. AB 51 was signed into law by Governor Gavin Newsom on October 10, 2019, and applies to “contracts for employment entered into, modified, or extended on or after January 1, 2020.” The law prohibits any person from requiring applicants and employees, as a condition of employment, continued employment, or the receipt of any employment-related benefit, to waive any rights, forum, or procedure established by the California Fair Employment and Housing Act (“FEHA”) and the California Labor Code.

The Impact of AB 51
Although AB 51 was originally promoted to target the #MeToo movement and was characterized as a anti-sexual harassment law, because many sexual harassment claims against employers have been kept from public view by resolutions in private arbitrations rather than public court proceedings. But the new law covers much more than just sexual harassment claims. In practical effect, AB 51 would prohibit most employers from requiring employees to sign mandatory arbitration agreements for nearly all types of employment law claims, including any discrimination claims covered under FEHA and for any claims brought under the California Labor Code. AB 51 also precludes employers from threatening, retaliating or discriminating against, or terminating any job applicant or employee for refusing to consent to arbitration or any other type of waiver of a judicial “right, forum, or procedure” for violation of the FEHA or the Labor Code.

Nor can employers avoid AB 51 by having a standard arbitration agreement that requires applicants or employees to “opt out” to avoid. The law effectively prohibits employers from using voluntary opt-out clauses to avoid the reach of the bill. New California Labor Code Section 432.6(c) states that “an agreement that requires an employee to opt out of a waiver or take any affirmative action in order to preserve their rights is deemed a condition of employment.”

In addition, new Government Code Section 12953 states that any violation of the various provisions in AB 51 will be an unlawful employment practice, subjecting the employer to a private right of action under FEHA. Although this will presumably require an employee to exhaust the administrative remedy under FEHA, this provision would nevertheless lead to further exposure for California employers who utilize arbitration agreements with their employees. Importantly, however, AB 51 explicitly does not apply to post-dispute settlement agreements or negotiated severance agreements.

Federal Preemption of AB 51?
Generally, the Federal Arbitration Act, 9 U.S.C. § 1, et seq., (“FAA”) preempts state laws like AB 51 that attempt to regulate or restrict arbitration agreements. Under the FAA, a state may not pass or enforce laws that interfere with, limit, or discriminate against arbitration, and state laws attempting to interfere with arbitration have repeatedly been struck down by the U.S. Supreme Court as preempted by the FAA. AB 51, however, expressly states that it does not invalidate a written arbitration agreement that is otherwise enforceable under the FAA. Proponents of AB 51 argue that it is not preempted by the FAA because it only impacts “mandatory” arbitration agreements and does not affect “voluntary” agreements.

Impending Court Challenges
Many questions surrounding the validity and application of AB 51 remain unanswered. Therefore, legal challenges on the ground that AB 51 is preempted by the FAA were inevitable. On December 6, 2019, the U.S. and California Chambers of Commerce filed a complaint in the U.S. District Court for the Eastern District of California, alleging that AB 51 is preempted by the FAA. The complaint seeks a permanent injunction to halt enforcement of AB 51 until its legality is determined. The January 10, 2020 hearing of the preliminary injunction may give strong indication which way the Court will turn on the issue for the time being, but the ultimate determination will likely take years to wend its way through the Ninth Circuit Court of Appeal and perhaps the U.S. Supreme Court.

What Should Employers Do In Response to AB 51?
As this challenge to AB 51 makes its way through the courts, employers with ongoing arbitration agreements (or those interested in implementing arbitration programs) face a difficult choice starting in 2020: Play it safe and strike all mandatory arbitration agreements, or maintain the status quo until the litigation plays out. There is no one-size-fits-all approach that will work for every employer.

Employers currently using arbitration agreements should consider either staying the course based on the assumption that AB 51 will be held preempted by the FAA and therefore unenforceable, or suspending their arbitration programs until more clarity on AB 51 is provided. Employers implementing arbitration programs after January 1, 2020 should consider including in their arbitration agreements specific language to conform with Labor Code 432.6 and emphasizing the voluntary nature of the agreement.

The attorneys at Conkle, Kremer & Engel remain vigilant on employment law developments to advise businesses on all aspects of employee legal relations, including updates on the use of arbitration agreements as uncertainty looms.

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