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Are Arbitration Clauses in Employee Agreements Legal in California?
Although California has banned forced arbitration clauses in employment agreements, legal experts have mixed opinions about the new law effective January 2020. In mid-January, U.S. District Court ruled until January 31, 2020 that the temporary restraining order preventing AB 51 from becoming law will remain in effect. The Court requested the State of California to provide additional information by January 17, 2020 to prove this lawsuit is illegal.
By signing Assembly Bill 51 (AB 51) in October 2019, California Governor Gavin Newsom added section 432.6 to the Labor Code. The new law prohibits employers across California from forcing employees to sign arbitration clauses in employment agreements that waives their right to sue their employer for violations of discrimination and harassment, retaliation, and all other violations under the Fair Employment and Housing Act (FEHA), as well as wage and hour violations under the Labor Code.
What is Binding Arbitration?
A third party, as known as an “arbitrator,” hears both parties in a legal dispute and then makes a decision. After an arbitrator makes a decision, he or she issues a binding arbitration award. Statistically, arbitration favors businesses over employees and consumers because arbitrators receive repeat business if they provide favorable decisions to employers.
Binding arbitration means the decision reached by the arbitrator is final. The arbitrator’s determination binds the parties and the result is enforceable by law. Signed arbitration clauses in employment agreements are a challenge to fight. Most businesses include arbitration agreements in their contracts. Without knowing, employees sign away their rights to have a fair and neutral judge or jury decide any dispute that might arise during the employment.
California Banned Forced Arbitration Clauses in Employee Agreements from 2020
It will no longer be lawful to include arbitration clauses in employment contracts in California starting 2020. Many workers do not realize that they signed an arbitration clause in employee agreement upon hiring, because the term is usually buried in a stack of hiring documents for job applicants and new employees to sign.
Arbitration clauses force employees to resolve complaints and legal disputes with their employer through private arbitration instead of filing a Court-supervised lawsuit. Arbitration offers nearly zero government oversight. It is conducted in a similar setting to a private hearing, in a conference room that is not open to the public, with no judge and no jury.
How Common Are Arbitration Agreements in the U.S.?
Statistics are not on the employees’ side when it comes to arbitration agreements, which is why employers are so eager to impose arbitration clauses in employment contracts. According to the Economic Policy Institute (EPI), at least 60 million workers across the United States have signed arbitration agreements with class action waivers.
What this means is that more than 60 million employees across the country cannot go to Court to protect their employment rights. Instead employees must go to arbitration, which is often costlier, less effective, and less fair than a Court-supervised legal action.
According to EPI, on average, employees win less often and receive much lower financial compensation in arbitration than they do in Court. Employers have the upper hand when they appear before the same arbitrator in multiple cases, mainly when an employee is not represented by an experienced and results-driven employment law attorney.
What is the AB 51 Law All About?
In a nutshell, AB 51 prohibits employers from requiring their existing or new workers to sign an arbitration agreement that waives “any right, forum, or procedure” for alleged violations of the FEHA and California’s wage and hour laws.
In other words, starting in January 2020, your employer can no longer force you to arbitrate legal disputes instead of going to Court. These legal disputes can include an employee’s complaints of discrimination, harassment, retaliation, wage and hour violations, or other alleged violations of the FEHA or Labor Code.
NOTE: AB 51 applies only to employment agreements entered into, modified, or extended on or after January 1, 2020. Therefore, arbitration provisions in preexisting employment contracts will not be affected by the new law.
AB 51 Conflicts with the Federal Arbitration Act (FAA)
The only problem is that courts could block AB 51 before it ever takes effect. That is because the new California law conflicts with the Federal Arbitration Act (FAA). As you may or may not know, federal law exempts state law if there is a clash.
Similar recent attempts at banning or restricting arbitration clauses have been struck down by courts as “conflicting” with the FAA, which was enacted almost a century ago by Congress to ensure the enforcement of arbitration agreements in the U.S.
Any state laws attempting to stand as an obstacle to arbitration have been repeatedly struck down by the U.S. Supreme Court. Interestingly, in 2018, Governor Jerry Brown vetoed two similar legislative efforts to prohibit arbitration clauses in California. In his veto message to AB-3080, which was crafted by AB 51’s author, Brown stated that the bill “plainly violates federal law.”
However, AB 51 explicitly states it will not invalidate an arbitration clause in employee agreements under the Federal Arbitration Act. The new employment law also does not apply to resolved settlement agreements or agreed upon severance agreements.
Challenges Ahead for AB 51
On December 06, 2019, in the U.S. District Court for the Eastern District of California, employers backed by the U.S. Chamber of Commerce and the National Retail Federation filed a lawsuit. The legal actions argues AB 51 violates federal arbitration law. The Court is scheduled to issue a preliminary ruling in January 2020.
While AB 51 is a sweeping victory for workers, a better understanding of the new law will come in 2020 when the Federal Court issues rulings on the enforceability of AB 51. In the meanwhile, under California law, workers in certain circumstances have the right not to sign any new forced arbitration provisions or agreements.
Disclaimer: The information in this blog post (“post”) is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from Ghuman Law Firm, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other applicable licensing jurisdiction.
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