California Gov. Gavin Newsom on Oct. 10 signed into law Assembly Bill 51. The new law, which goes into effect on Jan. 1, 2020, outlaws forced arbitration of a significant majority of claims employees and former employees can bring against their employer. Employers are now forced to decide whether to do away with mandatory arbitration provisions altogether, or keep them, in which case they must be significantly restructured to comply with the new law.

What is AB 51?

AB 51 adds new Section 432.6 to California’s Labor Code. It prohibits all employers from conditioning employment, continued employment or the receipt of any employment benefit (like a bonus or promotion) on a requirement that the applicant or employee waive the right to bring legal claims for any violation of the Labor Code or California’s Fair Employment and Housing Act (FEHA) in court or any other forum.

AB 51 also prohibits an arbitration approach where the applicant or employee must affirmatively opt out of mandatory arbitration, and it protects applicants and employees from retaliation for asserting their rights under the new law. Importantly, AB 51 does not prohibit an employee or former employee from voluntarily agreeing to pursue legal claims against their current or former employer through mandatory and confidential arbitration; they simply cannot be forced to do so.

AB 51 is unclear in at least one important respect. Although the law becomes effective on Jan. 1, 2020, and will apply to offer letters, employment agreements, etc. entered into or modified on or after that date, the new law also applies to employment agreements that are “extended” on or after that date. It is unclear whether, for example, an offer letter or other employment agreement currently in place between an employer and employee, with a (currently lawful) mandatory arbitration provision encompassing Labor Code and FEHA claims, will be deemed to be “extended,” and thus subject to the new law, if such agreement simply remains in place on Jan. 1.

What Does AB 51 Mean for Employers?

We anticipate aggressive legal challenges from industry groups and others to the enforceability of AB 51, and specifically that it is preempted by contrary federal law (the Federal Arbitration Act), and violates the U.S. Constitution’s Supremacy Clause. But such challenges, while they are pending, are unlikely to result in a stay or suspension of the new law. So, employers need to take note of, and carefully consider, the following:

  • For all employment agreements entered into or materially modified on or after Jan. 1, that include a mandatory arbitration provision, employers must ensure that the provision complies with AB 51, including clear language that the applicant or employee is not required to arbitrate Labor Code or FEHA claims, but that they can voluntarily elect to do so.
  • For existing employment agreements whose arbitration provisions do not comply with AB 51, employers have a choice: (1) leave the agreements as is, because they existed before the law went into effect and the law is prospective in effect; or (2) more conservatively, revise existing arbitration provisions in a manner consistent with AB 51, because they will remain in place on Jan. 1, such that they will be “extended” and thus subject to the new law. It is possible that lawmakers may issue some clarification around this ambiguity. That, coupled with the likely efforts to strike down or delay the effectiveness of the law, may support a “wait-and-see” approach for certain businesses who wish to preserve whatever they can from pre-AB 51 arbitration law.

Other business considerations may impact employer decision-making, including a desire for uniformity within the organization and to avoid having two different categories of employees—those who are forced to arbitrate everything, and those who have freedom to sue in court.

In light of AB 51, employers may question the value of any arbitration provision at this point. While it is true that the Labor Code and FEHA encompass a significant majority of the claims that current or former employees could bring against employers, there are many other claims (for breach of contract, tort claims like fraud and infliction of emotional distress, etc.) that are not covered by AB 51 and may lawfully be subject to mandatory arbitration. This could result in multi-claim lawsuits being split up between court and confidential arbitration, presenting logistical challenges for both litigants. But it also creates potential strategic litigation opportunities for the employer if the plaintiff must pursue related claims in two different forums.