New California Law Prohibits Mandatory Arbitration Agreements

Last October, California Governor Gavin Newsom signed Assembly Bill 51 into law, adding Labor Code section 432.6 into the Labor Code. This new section prohibits employers from requiring, as a condition of employment, that an applicant or employee agree to arbitrate claims brought specifically under California’s Labor Code or Fair Employment and Housing Act (“FEHA”).

The prohibition on mandatory employment arbitration agreements goes into effect on January 1, 2020, and applies to arbitration agreements entered into, modified, or extended on or after January 1, 2020. However, any arbitration agreements that were put in place prior to January 1, 2020 are unaffected and may be enforced. In addition, the new law does not entirely prohibit arbitration agreements with employees and does not apply to breach of contract claims or tort claims such as fraud or negligence.

Lawsuits have already been filed challenging the new law. Many prominent legal scholars project that this law will be struck down by the courts, as a similar law in New York was a few years ago. In the meantime, however, the law will go into effect on January 1, 2020.

California employers have three options with regards to employee arbitration agreements while challenges to the new law work their way through the courts.

First, they may wish to suspend the use of arbitration agreements unless and until a court strikes down the new law. Second, they may wish to narrow the scope of their arbitration agreement to only cover non-Labor Code and FEHA claims. Finally, they may wish to revise their arbitration agreement to include specific language that recognizes Labor Code section 432.6’s requirement that the arbitration agreement be voluntary. In conjunction with the revisions, California employers may wish to implement new Human Resource policies, including scripts or guides for onboarding, to ensure applicants/employees are properly advised that arbitration agreements are strictly voluntary.

Employers need to be aware that a violation of Labor Code section 432.6 is a misdemeanor and an employee may recover their attorneys’ fees in any lawsuit brought against and employer for mandating an arbitration agreement or attempting to enforce a mandatory arbitration agreement entered into after January 1, 2020.

To learn more about how Assembly Bill 51 and Labor Code section 432.6 could impact your business, contact us today at (949) 222-2008.

By Jehan N. Jayakumar and Ryan P. Kennedy