Calif. Companies Can Now Require Arbitration of Most Employment Disputes

A recent federal appeals court ruling has settled an issue that had been in flux in California: whether a state law could block employers from mandating that disputes with employees be submitted to arbitration rather than taken to court. The ruling means employer-employee agreements that are made expressly subject to the Federal Arbitration Act (FAA) are enforceable in California — unless and until further action is taken by the state legislature.

The case, Chamber of Commerce v. Bonta, was brought by business organizations seeking to prevent California officials from enforcing a 2020 amendment to the California Labor Code, known as AB 51. The code provision purported to forbid employers from requiring employees to agree to arbitration as a condition of employment. It also imposed criminal penalties on employers, namely a prison term of up to six months, a fine of up to $1,000 or both, for each violation.

The FAA is a federal law that preempts state laws that run counter to its purpose, which is to encourage arbitration of employment disputes. However, the California legislature attempted an end run around the FAA by criminalizing an employer’s requiring arbitration while at the same time upholding such agreements as enforceable.

The federal district court issued an injunction against AB 51, finding that the penalties it imposed thwarted the purpose and intent of the FAA by imposing a severe burden on the formation of arbitration agreements. Most recently, the Ninth Circuit Court of Appeals affirmed the injunction based on the same reasoning.

The ruling means that businesses can require arbitration clauses in employment agreements that are governed by the FAA, which includes most such agreements. Arbitration can resolve most if not all types of workplace disputes. The arbitration forum offers employers numerous advantages over litigation, including privacy, lower costs and time savings. Arbitration can also serve as barrier against class actions and mass tort suits.

Nevertheless, employment agreements that include mandatory arbitration provisions are subject to challenges such as alleged fraud or unconscionability. The employee must be made fully aware of the agreement’s terms and expressly accept them prior to signing, or the arbitration mandate might not be enforceable. Having an arbitration attorney fully involved in the drafting and administration of these clauses is the best path to staying in compliance with California and U.S. law.

Quinn & Kronlund LLP in Stockton provides effective arbitration forums for a wide range of legal matters throughout northern California. Feel free to contact us online or call 209-943-3950 to learn more about our services.