On October 10, 2019, California Governor Gavin Newsom signed Assembly Bill 51 (“AB51”), which on its face would prohibit employers from requiring job applicants and employees to arbitrate claims under the California Labor Code and the Fair Employment and Housing Act, California Government Code §§ 12900 et seq (“FEHA”). The bill, a component of the legislative reaction to the #MeToo movement, seeks to ensure employees maintain their right to sue employers in court and retain access to the procedural class action mechanism. The bill will go into effect in January 2020; legal challenges are a virtual certainty. Indeed, courts are likely to find that AB51 conflicts with the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq. (“FAA”), which establishes a strong federal policy favoring arbitration. The United States Supreme Court has previously found that the FAA preempted California laws restricting arbitration of certain employment disputes. Additionally, in June 2019, a New York federal court held that the FAA controlled over a similar New York State law that prohibited forced arbitration of sexual harassment claims.

AB51’S CURRENT STATUS AND CONTENT

AB51 passed the state Assembly in May 2019 and the state Senate in September 2019. Governor Gavin Newsom signed the bill on October 10, 2019, in what has become a legislative session of sweeping change to California’s employment laws. (See California Lawmakers Send AB5 to Governor's Desk, dated Sep. 13, 2019.) Introduced by Assembly member Gonzalez, the same representative who introduced AB5, AB51 adds a new section to FEHA as well as a new section to the California Labor Code. The bill will go into effect on January 1, 2020, and represents the third attempt by California lawmakers to pass similar statutes. Former Governor Jerry Brown vetoed similar bills in 2015 and 2018, stating that he believed these bills ran afoul of United States Supreme Court precedent and federal law.

AB51 contains two primary provisions. First, it prohibits employers from requiring applicants or employees to waive any right, forum, or procedure for a violation of FEHA and the California Labor Code. Second, it prohibits employers from retaliating against any applicant or employee who refuses to waive such right, forum, or procedure, including by refusing to sign an arbitration agreement. The bill confirms that it even covers arbitration agreements that contain an opt-out clause or other provisions allowing employees to take certain actions to preserve their right to sue. A plaintiff who files suit and prevails under the new statute is entitled to injunctive relief and attorneys’ fees. In addition, a violation of AB51 will be a misdemeanor pursuant to California Labor Code § 433. Finally, since the substance of AB51 will be located in the California Labor Code, it will presumably be enforceable through the Labor Code Private Attorneys General Act, California Labor Code §§ 2698 et seq. (“PAGA”).

AB51 states explicitly that it “applies to contracts for employment entered into, modified, or extended on or after January 1, 2020” and contains three key exclusions:

  • Persons registered with a self-regulatory organization as defined by the Securities Exchange Act of 1934,
  • Post-dispute settlement agreements and negotiated severance agreements, and
  • Any “written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act.”

THE IMPACT OF THE FAA

This last exclusion could well be the proverbial exception that swallows the rule. AB51 is certain to be challenged in court. There is a strong likelihood that it will be preempted under the FAA. The FAA embodies a strong federal policy favoring arbitration and preempts state laws to the extent they impede arbitrations covered by the FAA. Courts have previously held that the FAA preempted a variety of California laws. For example, in AT&T Mobility v. Concepcion, 563 U.S. 333 (2011), the United States Supreme Court found held that the FAA preempted a California law that barred class action waivers in arbitration agreements. The Court stated that the California law amounted to an anti-arbitration rule, ran contrary to arbitration’s goals of informality, speed, and cost-effectiveness, and stood “as an obstacle to the accomplishment” of the FAA’s objectives. See also Perry v. Thomas, 482 U.S. 483, 490 (1987) (FAA preempted a provision of the California Labor Code authorizing lawsuits for unpaid wages “without regard to the existence of any private agreement to arbitrate”); Preston v. Ferrer, 552 U.S. 346, 359 (2008) (FAA preempted a California law vesting exclusive original jurisdiction in a state administrative agency). Under this interpretation, and given AB51’s exclusion of contracts “otherwise enforceable under” the FAA, it may well be the case that AB51 will only apply to small employers that do not impact interstate commerce and are therefore outside the purview of the FAA.

Indeed, earlier this year, a federal district court enforced an arbitration agreement despite a New York state law similar to AB51. See Latif v. Morgan Stanley & Co. LLC, No. 18-cv-11528 (DLC) (S.D.N.Y. June 26, 2019). That state law prohibited forced arbitration of sexual harassment claims and contained a similar exclusion regarding agreements enforceable under “federal law.” The court found that the New York law conflicted with the FAA because it outright prohibited arbitration of a particular type of claim. Thus, the court compelled the plaintiff’s sexual harassment claim to arbitration pursuant his agreement with his employer.

It should be noted that the Legislature is well aware of these arguments and purports to have drafted AB51 in a way to avoid preemption. A June 17, 2019, bill analysis by the Senate Committee on Labor, Public Employment and Retirement states (quoting from a similar analysis of one of AB51’s predecessors) that “the bill does not prohibit, restrict, or discourage anyone from entering into a mandatory arbitration agreement, if they wish to consent to do so freely and voluntarily” and it “does not interfere with enforcement of arbitration agreements.” Rather, “[a]ll the bill does is say that an employee cannot be forced to sign an arbitration agreement, and if the employee elects not to, the employee cannot be retaliated against.” This argument appears strained at best, as a bill that expressly prohibits an employer from requiring arbitration as a term of employment is clearly disfavoring arbitration provisions and treating them differently than other contractual terms – the exact outcome that the FAA prohibits.

Accordingly, despite the Legislature’s analysis, courts are likely to find that AB51 prohibits certain types of actions from being arbitrated and therefore directly interferes with the FAA’s goal of promoting and facilitating arbitration, warranting preemption and/or invocation of the exception regarding agreements enforceable under the FAA.

TAKEAWAYS

Even if courts ultimately find that the FAA controls over AB51, companies in California should keep the following in mind:

  • Employers should be aware that arbitration agreements “entered into, modified, or extended on or after” January 1, 2020 will come with the risk of litigation and associated costs until courts resolve the FAA issue.
  • Employers that are sufficiently large, or that can otherwise show an impact on interstate commerce, should make clear that their arbitration agreements are covered by and subject to the FAA – including by stating so explicitly in said agreements.
  • AB51 will apply even if your arbitration agreement contains an opt-out clause or other method through which employees may preserve their right to sue in court.
  • AB51’s effective date is January 1, 2020, which provides a short window for determining the course of action you are comfortable with.