Most California employers can benefit from instituting arbitration agreements with their employees. Arbitration offers an alternative to costly civil litigation in court and is commonly used as a method to expeditiously resolve legal disputes. Employers often prefer arbitration over filed lawsuits because of its efficiency, potential customization and predictability – in comparison to jury trials.

Arbitration agreements, like all contracts, must always be entered into voluntarily.  However, courts in California and in the rest of the country have long held that mandating arbitration agreements as a condition of employment does not mean that the agreement was not entered into voluntarily.  A newly passed California law, Assembly Bill 51 (“AB 51”), could change this matter dramatically. AB 51 now prohibits employers from requiring employees to sign arbitration agreements as a condition of employment. This new law goes into effect on January 1, 2020 and adds Section 432.6 to the Labor Code, making it unlawful for employers to require any employee or job applicant to waive any right, forum or procedure for a violation of the California Fair Employment and Housing Act (“FEHA”) or other specified statutes as a condition of: (1) new or continuing employment, or (2) receiving an employment-related benefit.

AB 51 also precludes the possibility of using “opt-outs” from arbitration provisions as a means of making the provision voluntary. The new law expressly states that an agreement requiring employees to opt out of a waiver or take any other affirmative action to preserve their rights is still deemed “a condition of employment.”

To add some additional teeth to the statute, not only does AB 51 allow an employee successfully challenging an arbitration agreement under its terms to collect reasonable attorney’s fees, but it makes violation of the statute a crime.  Under Labor Code section 433, a violation of AB 51 is considered a misdemeanor that could subject a person to imprisonment of six months or less, a fine of $1,000 or less or both.

There is strong reason to believe that this law will be quickly challenged and that significant parts will be ruled preempted by the Federal Arbitration Act (“FAA”).  Mainly, other states have attempted to pass similar anti-arbitration laws and have been quickly been thwarted by the federal courts.  There are a few important loopholes already built in to AB 51 that are meant to survive judicial scrutiny, such as excluding arbitration agreements otherwise enforceable under the FAA.  These exclusions, however, likely will not be sufficient.

Nonetheless, most employers do not want to be the “test case.” For those simply looking to comply with the law, allowing another entity to challenge its enforceability, there are a few steps that can be taken.  Those include instituting mandatory arbitration agreements before January 1, 2020, reducing the types of actions the arbitration agreement covers (such as exempting FEHA and other specific statutory claims) and possibly simply transitioning agreements away from mandatory terms of employment.  Employers that are especially risk-averse may simply choose to suspend any arbitration agreement implementation while AB 51 is valid in its current form.

In general, employers need to be aware of AB 51, its provisions and its possible challenges.  Employers should consult with an experienced employment attorney to assess their comfortable level of risk and how that correlates to what types of arbitration agreements (if any) they offer.