What does that mean for California employers?
Last week Governor Gavin Newsom signed Assembly Bill 51, which outlaws mandatory arbitration of employment disputes. Employers who have relied on mandatory arbitration to resolve employment-based disputes must quickly reevaluate their policies and practices. The new law impacts only those agreements signed as of January 1, 2020. Prior arbitration agreements remain enforceable, even if employees were required to sign them as a condition of employment.
On a practical level, what does this mean for employers who rely on arbitration agreements to resolve disputes? Until now, employers could lawfully require applicants and new employees to agree to arbitration as a condition of employment. The U.S. Supreme Court has ruled that such agreements are valid under the Federal Arbitration Act, which mandates that arbitration agreements should be upheld and that states should not attempt to limit their scope or their enforceability.
The new law attempts to skirt such federal mandates by recognizing arbitration as lawful in general and outlawing only compulsory arbitration. It remains to be seen whether this targeted attack on arbitration will be deemed consistent with federal law. Certainly, the law will be challenged in federal court, and California courts may be prohibited from enforcing it—at least temporarily until federal appellate courts examine it. But the outcome of any such challenge will remain uncertain for years.
Steps to Implement Voluntary Arbitration Agreements
In the meantime, California employers who favor arbitration should consider the steps they can take to implement voluntary—as opposed to compulsory—arbitration agreements, as voluntary arbitration remains lawful under the new law. Such steps could include offering concrete benefits to new employees who agree to arbitration. Such benefits could include monetary payments, gift cards, paid time off or an increase in pay. Under California law, contracts are binding regardless of the amount of consideration, so any monetary reward should suffice to show the arbitration is voluntary instead of compulsory.
Some employers may consider abandoning arbitration altogether in order to avoid running afoul of the new law. However, notwithstanding the challenges triggered by the new law, arbitration will remain preferable for many employers for three main reasons. First, arbitrations are confidential. Second, arbitration agreements bars employees from attempting to expand their individual disputes into class actions. Third, arbitration is efficient because hearings can be set promptly, and discovery can be limited. In light of these benefits, employers should carefully consider whether to and how best to preserve their arbitration options.