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.