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Are Employment Arbitration Clauses Enforceable?

William B. Hanley, Attorney At Law Feb. 23, 2022

Employers generally rely heavily on arbitration clauses in their agreements with employees. Upon accepting a job offer, a prospective employee will often be required to sign what might be called an employment agreement or even an employee policy manual or handbook. Buried in the depths of these agreements is an arbitration clause, which requires an employee to take all grievances to arbitration rather than filing a lawsuit.

Though arbitration over workplace grievances or disputes can somewhat resemble the procedures followed in court, arbitration historically tends to be employer-friendly. The employer can choose an arbitrator they’ve used before who treated them favorably, thus shifting the odds against the employee.

California in 2019 passed Assembly Bill (AB) 51, which agreed to an arbitration clause voluntary. In other words, an employee or prospective employee can decline to sign an agreement with an arbitration clause and face no adverse consequence – cannot be denied employment, terminated, or retaliated against.

The law took effect in January 2020, but a federal judge initially blocked it. In late 2021, the 9th U.S. Circuit Court of Appeals overturned the ban, so until that decision is reversed, employment agreements beginning in 2020 and going forward must make their arbitration clauses voluntary with no penalties for non-agreement. Agreements signed before 2020 are still valid.

If you’re an employer in Irvine, California, or anywhere in the counties of Orange, Los Angeles, or San Diego, and you have questions or issues with arbitration clauses used in the course of your business, contact William B. Hanley, Attorney at Law.

William B. Hanley, Attorney at Law, has been practicing in employment and business law for more than four decades and possesses the experience, knowledge, and resources to help you and your business in any situation you face.

California Supreme Court & AB 51

AB 51, the law that made arbitration agreements voluntary, arose from a 2000 California Supreme Court decision in Armendariz v. Foundation Health Psychcare Services, Inc. In that decision, the court ruled that an arbitration clause would be invalid if it was procedurally unconscionable and substantively unconscionable.

The court defined any mandatory arbitration agreement as procedurally unconscionable on the surface. To be substantively unconscionable, the agreement cannot be unfair to the employee agreeing to it. To be fair – or substantively conscionable – to the employee, the court stated that the agreement must:

  • Not force the employee to bear any greater cost than going to court.

  • Grant the employee broad discovery rights.

  • Allow the employee access to the same type of relief as could be found in a court of law.

  • Assure that the chosen arbitrator will be neutral (and not employer-friendly).

  • Provide the employee with a written statement of the arbitration decision, allowing adequate judicial review.

California & Federal Arbitration Laws

The Federal Arbitration Act (FAA) applies to arbitration agreements in all 50 states and the District of Columbia. The California Arbitration Act (CAA) mostly parroted the FAA when originally written, but AB 51 made changes to the California Labor Code, codifying the standards of Armendariz.

AB 51 added section 432.6, which prohibits employers from “requiring any applicant for employment or any employee to waive any right, forum, or procedure for a violation of any provision of the California Fair Employment and Housing Act (FEHA) or other specific statutes governing employment as a condition of employment, continued employment, or the receipt of any employment-related benefit….”

AB 51 quickly ran into difficulty with the Federal Arbitration Act, which takes precedence over state arbitration statutes. Shortly after its enactment, the U.S. District Court for the Eastern District of California enjoined its enforcement because the law was preempted by the FAA.

On September 15, 2021, a panel of the 9th Circuit, by a 2-to-1 vote, overturned that decision in part, legalizing the requirement that arbitration agreements be voluntary, but voiding a section of the law that imposed civil or criminal penalties on employers, which would violate the FAA. Somewhat contradictorily, though, the panel also ruled that penalties could be imposed if an employee or prospective employee refused to sign and was fired or not hired.

The decision in Chamber of Commerce of the US v. Bonta may yet be reviewed by the 9th Circuit Court en banc (heard by all judges) or taken to the U.S. Supreme Court, so its fate is still uncertain.

How a Knowledgeable Attorney Can Help

AB 51’s requirement that arbitration agreements be voluntary is still in effect, pending any court challenges yet to be heard. This means that prospective employees and employees alike cannot be required to sign off on arbitration clauses in any type of employment agreement or policy statement. Penalties can apply if retaliation takes place for those who refuse to sign.

If you’re an employer in Irvine, California, you must speak with an attorney to review your documents issued to employees in accordance with the California employment law, the California Labor Code, as well as the FAA and CAA. And if you are still conducting arbitration hearings, you need to make sure you’re meeting the requirements of AB 51 and the Armendariz decision.

William B. Hanley, Attorney at Law, stands ready to advise you on arbitration agreements and procedures. With more than four decades of experience in the field, William B. Hanley, Attorney at Law, can guide and advise you so that you meet all California employment standards. He also proudly serves clients in Orange County, Los Angeles, and San Diego, California.