Federal Court Enters (Confusing) Injunction Against California's Arbitration Prohibition

A federal court in Sacramento has extended its injunction against California's A.B. 51, a new law prohibiting most mandatory employment arbitration agreements. This development follows our prior posts discussing A.B. 51 (here) and the court's initial temporary restraining order blocking its enforcement (here).

The full injunction has not been drafted yet and will be released in the coming days. For now, the draft injunction is a positive but confusing development.

On the one hand, the injunction does prohibit most enforcement of the new law. But on the other, it applies only to agreements "covered by the Federal Arbitration Act." This leaves some employers to determine whether any argument exists that their particular agreement is not covered by the FAA.

In practice this will not make much difference; most employment agreements are covered by the federal law. We now suggest, however, that arbitration agreements contain express language incorporating the FAA and - possibly - that language referring to state or "any other applicable law" be removed. As the plaintiffs in the case have argued, confusion caused by the law (and the court's injunction) remains dangerous due to its substantial civil and criminal penalties.

Final Pay – Rules Worth Reviewing

With many employers winding up seasonal operations, now is a good time to review California’s final-pay rules. Violating these requirements can be serious, sometimes resulting in waiting-time penalties up to thirty times an employee’s daily average wage.

When Must Final Pay be Made?

California Labor Code section 201 requires private employers who terminate an employee to pay accrued wages immediately upon discharge. Section 201 applies to all private-industry employers with few limited exceptions. The same rule applies to employees who quit their employment so long as they provide seventy-two hours’ notice before their departure.

Employees who terminate without providing seventy-two hours’ notice are treated differently. Under Labor Code section 202, wages are due seventy-two hours after the employer receives notice an employee is leaving (e.g., three days later for employees who quit without any notice). Employers who want to take advantage of this additional time are required to mail the final paycheck if an employee requests and provides a mailing address.

Determining an employee’s final workday day is not always easy. Temporary agency employees, for example, often leave a worksite when their assignment ends without knowing when or where their next assignment will be. California adopted a special rule, effective in 2009, for these employees. Under Labor Code section 201.3, bona-fide temporary services workers must be paid at least once a week but need not receive final pay for an assignment until the following week – even if there are no assignments before that time.

This does not apply to other types of temporary employees, or even to all temporary employee providers; farm labor contractors, for example, are excluded. It also does not apply to many employees on daily assignment and to employees working during a client’s labor dispute (such as those working during a strike or lockout), who must be paid each day.

There are special rules for other industries as well, such as those with workers curing, canning, or drying perishable fruit, fish, or vegetables; motion-picture and live event venue employees; and the oil drilling industry.

What Must Be Paid?

Final pay does not just include regular weekly wages. In California, all accrued vacation must be paid out at the employee’s final rate of pay. Sick leave (including California’s mandatory paid sick leave requirements) need not be cashed out, but other vacation-like benefits – such as PTO and personal days – must be paid as well.

Bonuses, commissions and other incentive payments must also be paid to the extent they are readily calculable (that is, if you can tell what they are).

Where an employee’s commissions are straightforward, for example, they should be paid without waiting for the next regular payout date. Where commissions or bonuses are difficult to determine, as when based on overall profitability, employers probably are justified waiting until an accurate determination can be made.

How Can Final Pay Be Made?

As noted above, employees who quit and are not paid immediately can ask for their pay to be mailed. This does not mean you can pay any other employees the same way. Final pay for quitting employees should be made at the regular pay location, usually an employee’s usual workplace, unless expressly authorized in writing by the employee. An employer must pay a discharged employee at the place of discharge.

Employers cannot unilaterally elect to mail the final pay and should not do so without written direction of the employee. Final payment by mail is deemed paid when an employee actually receives the pay, not when it was mailed, leading to substantial penalties if an employee claims the check was lost or misdirected. Don’t fall into that trap.

Conclusion

California’s final pay requirements can be confusing, especially where the employee does not simply pay all accrued wages before an employee leaves the premises. Employers should always consult with counsel or another qualified consultant if their payroll practices differ from the general rules set by Labor Code sections 201 and 202. Many a claim has been magnified, sometimes substantially, when a tiny payment was not made on time.

California Prohibits Most Mandatory Employment Arbitration Agreements (Despite Federal Law!)

Update: the United States District Court has heard arguments by telephone in the lawsuit challenging this new law and is expected to rule on the request for a temporary stay soon after December 26. We will update this post as the case develops!

California has interfered with employment arbitration agreements for many years. Despite federal authority prohibiting states from creating special rules for specific situations, state courts have long scrutinized employment arbitration far more thoroughly than other types of agreements.

Now, the state legislature has created an even greater obstacle to employment arbitration. Effective January 1, 2020, newly created Labor Code section 432.6 will prohibit employers from requiring arbitration of any action under the Fair Employment and Housing Act (California’s broad equal employment opportunity law) or the state Labor Code. While this probably does not invalidate existing arbitration agreements, it does apply to new agreements and any “modified” or “extended” after the law takes effect. The text of the new law can be viewed here.

Two additional parts of the law affect employers’ practical alternatives. “Opt out” provisions cannot be used, as the law prohibits employers from requiring any “affirmative” action by employees to avoid being bound by an agreement. Worse, some will argue that employers cannot even offer additional consideration (such as a sign-on bonus) because arbitration agreements may not be required “for the receipt of any employment-related benefit.”

There are limited exceptions, such as for employers required to use arbitration under other laws, and a cryptic exclusion for agreements “otherwise enforceable under the Federal Arbitration Act” (“FAA”).

This last point is significant, as the new statute almost certainly conflicts with federal arbitration law. Litigation on this point has already started: on December 6, the United States Chamber of Commerce filed a challenge under the FAA requesting a federal court to block the new law’s implementation. Status of the litigation can be seen on the U.S. Chamber’s website here.

Employers have options while the legal challenge continues. One is to provide purely voluntary arbitration agreements as part of the onboarding process. This could include language such as: “The parties enter this agreement voluntarily in exchange for their mutual promises and conditions; each party understands and agrees that the agreement is not required as a condition of employment, continued employment, or the receipt of any employment-related benefit.”

Another option is language carving out claims under the Fair Employment and Housing Act or California Labor Code (just as agreements typically exclude workers compensation and employee benefit claims) but covering other issues. This could be effective because, if a FEHA or Labor Code action is accompanied by other types of claims (such as common-law wrongful termination), a court would likely stay the non-arbitrable claims pending arbitration of all others.

We expect that the new law will quickly be stayed or overturned by a federal court. We also expect that many employers and organizations will file supporting (“amicus”) briefs explaining how the new law affects them. This is common where legal developments have a significant impact on employers; our attorneys have assisted with litigation or filed amicus briefs in many cases, including recent challenges to prevailing wage and home health care provider regulations.

Until the challenge is resolved, however, California employers using arbitration agreements will need to examine their language and their process when implementing them.