Mandatory Arbitration Agreements May Become Illegal in California

By: McKague Rosasco LLP on October 21, 2019  

Mandatory Arbitration Agreements May Become Illegal in California

Employers will be prohibited from entering into mandatory arbitration agreements with respect to most employment law claims under a new law set to go into effect on January 1, 2020. Governor Newsom signed Assembly Bill 51 on October 13, 2019. AB 51 amends the Labor Code to prohibit any person from requiring workers to arbitrate state discrimination claims or Labor Code claims.

AB 51 is likely to face lawsuits claiming it is preempted by the Federal Arbitration Act (FAA). There is a fair chance such a challenge will prevent AB 51 from going into effect. Nonetheless, employers should be aware that AB 51 allows prevailing employees to recover attorneys’ fees.

This prohibition on mandatory arbitration agreements applies to employment contracts “entered into, modified, or extended on or after January 1, 2020.” (New Labor Code § 432.6, subd. (h).) As the scope of AB 51 includes existing arbitration agreements modified or extended after January 1, 2020, employers will face a decision whether to modify all their current arbitration agreements prior to January 1, 2020. In the alternative, some employers may decide to hope a court decides AB 51 is unenforceable before its effective date.

What Does AB 51 Change?

AB 51 adds Section 432.6 to the Labor Code and prohibits a person (or employer), as a condition of employment, continued employment, or the receipt of any employment-related benefit, from requiring any applicant or employee to waive any right for a violation of the Fair Employment and Housing Act (FEHA) or the Labor Code. Much of the press coverage regarding AB 51 has discussed this legislation as a response to mandatory arbitration of sexual harassment claims. However, the text signed into law does not limit the scope of the new law to any class of claims under FEHA or the Labor Code.

AB 51 also applies to arbitration agreements implemented by voluntary opt-out clauses. The law states 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. (§ 432.6, subd. (c).) In addition, a violation of AB 51’s prohibition will be a misdemeanor under Labor Code section 433.

AB 51 does not prevent employees from entering into voluntary arbitration agreements.

The California Senate Judiciary Committee’s analysis of AB 51 emphasizes that the bill “prohibits employers from forcing employees to waive, as a condition of employment” the right to have discrimination and Labor Code claims heard “in the forum of their choice.” Employees remain free to sign arbitration agreements where they have been given a legitimate choice to do so unburdened by any of the leverage prohibited by AB 51.

Most Recent Arbitration Agreement Case

A recent decision from the Northern District of California offers a textbook list of the things employers should not do when attempting to present a voluntary arbitration agreement. In Martinez-Gonzalez v. Elkhorn Packing Co., LLC (N.D.Cal. Oct. 29, 2019, No. 18-cv-05226-EMC) 2019 U.S.Dist. LEXIS 187531, the court found an arbitration agreement unenforceable because of the economic duress and undue influence exerted by the employer. In Martinez-Gonzalez, the employee, along with more than one hundred H2A co-workers, was presented with an arbitration agreement for the first time in a hotel parking lot after working a full day in a lettuce field.

The employee was not told the agreement was voluntary, the employee reasonably understood he could not seek employment with a different U.S. employer on an H-2A visa, the employee believed he would lose his job if he did not sign the agreement, and the employee was living in housing provided by his employer. In addition, the employee was not given time to review the agreement on his own, was not provided with the agreement in advance, was not told he could take the document with him and sign it later, was not offered a copy of the signed agreement, and was made to stand on his feet while his co-workers completed their paperwork. Taken together, the court found these facts established the contract was entered into under economic duress and undue influence.  For H2A workers, employers should present any arbitration agreements at the time of recruitment and before they have left their own country. 

Now What?

As this law covers new arbitration agreements entered into after January 1, 2020, and agreements modified or extended after January 1, 2020 – employers will need to decide whether to maintain their existing arbitration agreements or modify them in the next two months. While there are certain to be lawsuits challenging the enforceability of AB 51, such litigation could go on for years before producing a clear answer. In the meantime, employers who keep mandatory arbitration in place run the risk of lawsuits claiming violations of AB 51.  Contact the experts at McKague Rosasco LLP to see if your arbitration agreement needs to be updated or implemented before the New Year.  If you have an arbitration agreement from McKague Rosasco LLP in place now, you will need the new version starting January 1, 2020.

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