On September 15, 2021, the Ninth Circuit Court of Appeals held the decision of Chamber of Commerce v. Bonta that the Federal Arbitration Act (“FAA”) does not fully preempt California Assembly Bill 51 (“AB 51”), reversing a lower court ruling holding that AB 51 was preempted by the FAA. As a result, employers are now prohibited from requiring applicants and employees in California to enter into mandatory arbitration agreements as a condition of employment.
AB 51 prohibits employers from requiring employees and applicants to waive any right, forum, or procedure, including the right to file a civil action or complaint, as a condition of employment or continued employment. Requiring an employee to opt out of arbitration is also deemed an impermissible condition of employment. A violation of Section 432.6 (the amendment to AB 51) is a criminal misdemeanor under the Labor Code that can subject an employer to potential civil and criminal penalties, including up to six months in jail. AB 51 was first passed in October 2019 and was to become effective on January 1, 2020. However, a U.S. District Court judge issued a TRO on December 28, 2019, followed by a Preliminary Injunction on January 31, 2020, against the State of California, enjoining the State from enforcing AB 51 on the grounds the California statute was preempted by the FAA.
The judges in the majority concluded that because AB 51 was focused on the conduct of the employer prior to entering into an arbitration agreement, the statute did not conflict with the FAA and the State was free to regulate that conduct and prohibit employers from requiring mandatory arbitration as a condition of employment. Accordingly, employers cannot seek to require California applicants and employees to enter into mandatory arbitration agreements as a condition of employment.
However, AB 51 does not void any arbitration agreements previously entered into under the FAA, does not prohibit employers from offering arbitration on a voluntary basis and, strangely, does not void or render unenforceable an arbitration agreement signed by any person going forward under the FAA, even if the agreement had been required as a condition of employment.
Notably, the Ninth Circuit majority also concluded that if the employee does in fact sign the arbitration agreement, then not only is the agreement valid and enforceable under the FAA (and AB 51), but the criminal and civil penalties that otherwise would be available for violations of the law are preempted by the FAA and cannot be enforced by the State against the employer. This creates the bizarre situation that if the employer offers an arbitration agreement as a condition of employment, and the prospective employee executes the agreement, the employer may not be held civilly or criminally liable. But if the prospective employee refuses to sign the agreement, then the FAA does not preempt AB 51 and the employer can face civil and criminal liability for having presented the agreement as a condition of employment.
Bottom line: It is highly recommended that employers in California do not offer arbitration agreements to applicants or employees. While the ruling allows an employee to voluntarily enter into such contracts, the Court has clearly stated that the mere offer of such an arrangement is illegal.
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