HR Legalist

Arbitration Update: Federal Judge Prohibits California’s Mandatory Employee Arbitration Ban

As previously covered here, the California Legislature has long been searching for a way to prevent employers from requiring prospective employees to sign arbitration agreements as a condition of employment without running afoul of the Federal Arbitration Act (“FAA”). After Governor Jerry Brown vetoed such an attempt in 2018 because he believed the bill violated the FAA, the Legislature tried again and passed Assembly Bill 51 (“AB 51”), which was signed by Governor Gavin Newsom on October 10, 2019. AB 51 prohibits employers from requiring prospective employees to sign arbitration agreements as a condition of employment, and prohibits employer retaliation if an employee refuses to do so. This, the logic goes, is sufficient to avoid triggering FAA preemption because AB 51 neither prohibits nor invalidates arbitration agreements. Rather, it simply permits employees to refuse to sign such an agreement and prohibits employers from doing anything about it.

A federal judge in the Eastern District of California disagreed with this line of thinking and enjoined enforcement of the law on December 30, 2019. In issuing the injunction, the Court noted that the plaintiffs “have raised serious questions regarding whether the challenged statute is preempted by the Federal Arbitration Act as construed by the United States Supreme Court.” Further suggesting that the Legislature had overstepped its bounds, the Court pointed to the fact that violating AB 51 carries criminal penalties, and that permitting it to take effect, even briefly, will “cause disruption in the making of employment contracts….” In light of this, California’s Attorney General, Labor Commissioner, Secretary of the California Labor and Workforce Development Agency, and Director of the California Department of Fair Employment and Housing were all temporarily enjoined from enforcing AB 51 until the plaintiffs’ motion for a preliminary injunction is heard on January 10, 2020.

New Jersey may soon enter this debate as well. As noted previously by HR Legalist, New Jersey amended its Law Against Discrimination (“LAD”) last March in such a way that it arguably now prohibits arbitration agreements in employment contracts. Attorneys seized on this ambiguity in Guirguess v. Public Service Electric and Gas, but the Court determined that the amendment to the LAD applies only prospectively, and the agreement was signed prior to the amendment. Thus, the issue of whether the amendment to the LAD prohibits arbitration agreements in employment contracts was not squarely before the Court, but surely will be soon.

We will continue to provide updates as these issues develop.

The information contained in this publication should not be construed as legal advice, is not a substitute for legal counsel, and should not be relied on as such. For legal advice or answers to specific questions, please contact one of our attorneys.