On October 13, 2019, California Governor Gavin Newsom signed Assembly Bill (AB) 51 into law, banning most employment arbitration agreements in California starting January 1, 2020. This new law is expansive in scope but short on certainty, as it raises several questions and will likely face legal challenges.

What Does AB 51 Do?

AB 51 prohibits employers from requiring applicants, employees, and potentially independent contractors to waive any right, forum, or procedure established by the California Fair Employment and Housing Act and the Labor Code. The law applies to “contracts for employment entered into, modified, or extended on or after January 1, 2020.” The stated purpose of AB 51 is to ensure that any contract relating to those rights and procedures be entered into voluntarily and without coercion. Due to its particular placement in the Labor Code, violation of the law will constitute a misdemeanor.

Last year, then-Governor Jerry Brown vetoed a similar bill, AB 3080 (2018). In his veto message, he stated: “Since this bill plainly violates federal law, I cannot sign this measure.” Governor Brown did sign SB 1300 (2018), however, which, among other things, added section 12964.5 to the Government Code. That section contains language similar to this year’s AB 51, as it makes it unlawful for an employer to require that employees, as a condition of employment, waive their right to pursue a civil action for an alleged violation of the Fair Employment and Housing Act.

What About Preemption?

Generally, the Federal Arbitration Act, 9 U.S.C. § 1, et seq., (FAA) preempts state laws like AB 51 (and Government Code section 12964.5) that attempt to regulate and/or restrict arbitration agreements more strictly than other types of contracts. The U.S. Supreme Court has issued recent decisions that uphold the primacy of the FAA.

AB 51, however, expressly states that it does not invalidate a written arbitration agreement that is otherwise enforceable under the FAA. Such statutory language is untested in California, and so the impact of this “savings clause” is difficult to predict at this time. Other questions also remain unanswered. For example, does a current agreement “extend” into 2020 if it is not abrogated by the parties prior to January 1?

Many in the labor and employment law field anticipate a successful legal challenge to AB 51 on the grounds that it is preempted by the FAA, which would eventually invalidate the law. Such a challenge could mean that the law’s validity may remain unsettled for some time.

Next Steps

Employers face difficult choices in the wake of AB 51. If existing arbitration programs are left unchanged, there is the risk of violation of the new law, which is in itself a misdemeanor. Employers could consider modifying their arbitration agreements to utilize either “opt-in” or “opt-out” clauses, but these options are also imperfect in the wake of the statute. Employers may also wish to consider supporting or joining a trade association or a coalition of like-minded businesses to mount a legal challenge to the law on FAA preemption grounds. The Supreme Court has consistently and uniformly invalidated state efforts such as this that interfere with FAA-governed arbitration agreements.

Due to the complexity of this issue and the wide variety of arbitration programs and agreements that are in effect and could be contemplated in California workplaces, businesses with operations in the Golden State should consult with competent employment law counsel before implementing arbitration agreements, or before modifying existing arbitration programs.