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Despite the hubbub, a new California law purportedly banning mandatory employment arbitration agreements does not completely change the game, and federal law still allows employers to use such agreements.

On October 10, 2019, Governor Newsom signed AB 51 (to be codified as Cal. Lab. Code § 432.6(c)). The new law on its face prohibits employers from requiring California employees to arbitrate certain employment disputes, even if the employees are given the option of opting out of arbitration. More ominously, AB 51 criminalizes retaliation against employees who refuse arbitration, among other remedies.

At first glance, the law appears to render mandatory arbitration in employment agreements obsolete, and many have been quick to trumpet this “sea change” in California law. But federal law, specifically, the Federal Arbitration Act, has not changed. The FAA preempts any state law that “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress [in the FAA] . . . .” AT&T Mobility LLC v. Concepion, 131 S. Ct. 1740, 1753 (2011). And the odds are good that courts will quickly find AB 51 to be just such a preempted obstacle.

The drafters of AB 51 virtually concede as much. The statute attempts to save itself by declaring “Nothing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act [FAA].” And while plaintiffs’ lawyers will predictably argue that this exception applies only to arbitration agreements voluntarily entered into by employees, the flaw in that argument is easy to spot. AB 51 excepts all FAA-governed arbitration agreements from its scope, including those that employees or applicants are required to sign. A plain reading of the statute shows that it does not apply to any FAA-governed arbitration agreement, regardless of whether the agreement is mandatory or voluntary.

And even if mandatory arbitration agreements are subject to AB 51, the result is the same. Employers can look to New York’s experience as a predictor of how AB 51 will fare. In Latif v. Morgan Stanley, the U.S. District Court for the Southern District of New York held that New York’s version of AB 51 was preempted to the extent it conflicted with the FAA. Under the FAA, arbitration agreements only may be invalidated with defenses that apply generally to any contract. The court in Latif cited U.S. Supreme Court precedent in holding “defenses that apply only to arbitration” or relate only to the fact that an arbitration agreement is at issue will not invalidate the agreement. And the court rejected the plaintiff’s argument that the state law specifically banning mandatory employment arbitration agreements was a defense that applied universally or neutrally to all contracts. The court noted, “The FAA sets forth a strong presumption that arbitration agreements are enforceable and this presumption is not displaced by [the New York state law]…the analysis is straightforward: the conflicting rule is displaced by the FAA.”

Key Takeaways:

• Because AB 51 takes effect January 1, 2020, employers who wish to avoid the debate about AB 51’s legality should consider rolling out arbitration programs before the statute is effective.

• Even after the New Year, employers should still be able to require employees to sign arbitration agreements if the agreements are governed by the FAA. Since FAA arbitration agreements are expressly preempted from AB 51, employers can still insist on employees signing such agreements as a condition of employment, and employers should still be able to terminate or refuse to hire employees or applicants who refuse to sign.

• Alternatively, employers may wish to handle applicants or employees who refuse to sign on a case-by-case basis. Even if some employees or applicants don’t sign, it’s likely that most will thus significantly reducing the risk that a plaintiff’s attorney will be able to line his or her pockets with class action fees.

Contact your Baker McKenzie employment attorney for more.