What’s Happening with Arbitration Clauses in California Employment Contracts?

Whether employers should be allowed to require their employees to enter into mandatory arbitration agreements has been a hotly contested question in the US for a long time. Meanwhile, regulators in California have made it clear that they believe employers should not be permitted to make an arbitration agreement a prerequisite of employment.

California’s AB 51 on Arbitration Clauses in Employment Contracts

AB 51, which passed and was signed into law by the California governor in 2019, outlines that employers are not allowed to require job applicants to agree to arbitration in exchange for employment. A 2019 injunction blocked the laws from taking effect on January 1, 2020 on the basis that AB 51 is preempted by the Federal Arbitration Act (FAA), again leaving mandatory arbitration provisions in a state of limbo. 

On September 15, 2021, the Ninth Circuit vacated the preliminary injunction, effectively restoring the prohibition on mandatory employment arbitration agreements. The recent ruling also eliminated the penalty provisions.

Two key takeaways from the ruling (thus far) are: 

• Arbitration agreements that are subject to the FAA are enforceable, even if they were entered into after January 1, 2020. 
• Requiring arbitration in exchange for employment is risky where the contract was entered into, modified, or extended on or after January 1, 2020. 

The Court’s Current Position on AB 51

The Ninth Circuit’s decision invalidated the penalty provisions to the extent they apply to an arbitration agreement governed by the FAA. Additionally, California employers are not permitted to threaten, retaliate, or discriminate against any employee who refuses to enter into an arbitration agreement. 

If you are considering an employment arbitration agreement, we recommend you reach out to legal counsel. 

Action Items for California Employers Considering Arbitration Clauses in Employment Contracts:

1. If you required employees to sign an arbitration agreement as a condition of employment since January 1, 2020, we suggest that you consult with your legal counsel. 
2. We suggest you review your new hire and other employment offer documents to remove any references to mandatory arbitration in exchange for employment. 
3. We suggest you consult with counsel to map out a path for dispute resolution provisions in employment contracts going forward, such as a stand-alone voluntary arbitration agreement. 

If you need assistance with these action items, get in touch. We’re here to help. 

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