Mandatory Arbitration Agreements are no longer allowed in California.

The enforceability of arbitration agreements is one of the most litigated and appealed issues in employment law. And now the appellate courts are at it again. On September 15, 2021, the Ninth Circuit Court of Appeals in Chamber of Commerce v. Bonta, issued an important ruling on the enforceability of arbitration agreements. You might have heard about a law passed last year called AB 51, which prohibited California employers from forcing employees to sign arbitration agreements as a condition of employment. The bill even went so far as to make it a misdemeanor for employers to use mandatory arbitration agreements.

Predictably, AB 51 was challenged as unconstitutional and preempted by federal law. On February 3, 2020, a federal judge in Sacramento issued a preliminary injunction of AB 51, halting its enforcement until full appellate review. Now, a year and a half later, the 9th Circuit has reversed the lower court’s decision and lifted the injunction, determining that federal law does not preempt AB 51’s ability to govern arbitration agreements, ultimately holding that the ban on mandatory arbitration agreements is valid. The Ninth Circuit did strike down the criminal provisions in AB 51, so California employers need not fear that they will be thrown in arbitration jail for requiring arbitration agreements (though they will have those agreements struck down as unenforceable, putting a business at risk for an expensive class action lawsuit).

The U.S. Supreme Court Will Eventually Make a Final Ruling

This is not the end of the story. The 9th Circuit has a long track record of being reversed by the United States Supreme Court, which has historically favored arbitration agreements. This decision also puts the Ninth Circuit at odds with other federal appellate courts. And the opinion itself, when read carefully, is full of ambiguity and internal inconsistency. Faced with a split among the various federal courts across the nation on whether states may enact legislation impacting the validity of arbitration agreements, the Supreme Court is likely to weigh in, though it may be a year or longer before there is any resolution.

What This Means for CA Employers Now 

Every California employer should consider presenting arbitration agreements to its employees if they are not already in place. With wage and hour class action lawsuits being filed at a record pace, arbitration agreements with a class action waiver are one of the best preventative measures you can take if you have hourly employees in California.

If you have been a Medina McKelvey client at some point over the past three years, AB 51 and this email shouldn’t worry you or require you to change anything. That is because you likely already have received our advice that voluntary arbitration agreements are a best practice given how California courts typically try to find creative ways to strike down arbitration agreements under the guise of “fairness” (known in the law as “procedural unconscionability”). We have been anticipating a law like AB 51 for some time now and thus have developed a streamlined system for rolling out voluntary arbitration agreements to all new hires and current employees—and even to employees in the midst of current litigation.

Our arbitration agreement and approach has been vetted and approved by numerous leading wage and hour mediators and has saved our clients collectively millions of dollars in exposure in wage and hour class action lawsuits. If you don’t already have a voluntary arbitration agreement program in place, or if you do have arbitration agreements that you have questions about, feel reach out to one of our team members for a consultation.

If you do have mandatory arbitration agreements in place, you can no longer enforce them given this recent court decision.  If that is the case, contact us. We can work with your business to transition from mandatory to voluntary arbitration agreements with minimal disruption to your business and to employee morale.