Arbitration as a Condition of Employment: What Employers Can Do Now with the Preemption of AB 51
On February 15, 2023, the Ninth Circuit Court of Appeals delivered another chapter in the arbitration agreement saga playing out in California and across the U.S. in a case called Chamber of Commerce of the U.S. v. Bonta. You might have already heard about or seen this in legal news and on social media. Rather than being the first to report on this, we wanted to take the time to carefully consider the case and its implications for California employers.
To summarize the Bonta case, a three-judge panel for the Ninth Circuit found that the Federal Arbitration Act (FAA) preempts AB 51, a California law that prohibits the formation of mandatory employment arbitration agreements. The decision means that requiring employees to sign an otherwise reasonable arbitration agreement as a condition of employment may be permissible; whether arbitration agreements should be mandatory is a more complicated question.
More Complicated Than it Seems
This might seem like a positive decision in favor of employers—and indeed many commentators are heralding it as such. But California employers should be wary. All three branches of the California government have been opposed to mandatory arbitration agreements in recent years, and it is possible, if not likely, that California will try to find another way to require voluntary arbitration agreements in the near future. This could invalidate any mandatory arbitration agreements rolled out between now and then, requiring a disruptive and confusing additional rollout after that. The governing California Supreme Court case on arbitration agreements, Armendariz v. Foundation Health Psychare Services, Inc., still gives California courts discretion to strike down arbitration agreements that they find to be “procedurally unconscionable,” which includes undue influence and pressure in the arbitration agreement process.
The FAIR Act
This is not just an issue in California. After a number of Supreme Court decisions found in favor of employers in arbitration disputes, Democrats in both houses of Congress introduced the Forced Arbitration Injustice Repeal Act (the FAIR Act) in February 2019. The proposed bill would invalidate any contract that requires forced arbitration (outside of limited conditions), making judges the decisionmakers in disputes where arbitration is required, and prevent employment contracts from blocking an employee’s engagement with labor unions due to arbitration. The bill was re-introduced in the 117th Congress after not passing the Senate in the 116th Congress.
What Does This Mean for Your Business?
California employers should be cautious in their approach to arbitration agreements. If you have worked with our compliance team, you’re likely already aware of our recommendation that employers utilize voluntary arbitration agreements. If you have already rolled out voluntary agreements to your employees, we find NO compelling reason to replace those with mandatory agreements. As for replacing those voluntary agreements with mandatory ones for all new hires, that is not a decision we encourage employers to make lightly. Requiring arbitration agreements for California employees requires careful thought and a risk tolerance assessment, along with the counsel of experienced employment attorneys, such as the attorneys at Medina McKelvey.
