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California Employers May Now Require Arbitration as a Condition of Employment

Thomas M. Lee

The Ninth U.S. Circuit Court of Appeals in Chamber of Commerce v. Bonta, 20-15291 held yesterday in a 2-1 decision that California businesses may require an agreement to arbitrate employment disputes as a condition of being hired or continued as an employee.

The Court affirmed a preliminary injunction barring enforcement of AB 51. This bill was signed into law by Gov. Gavin Newsom on October 10, 2019 and provides for civil and criminal penalties for employers that require assent to an arbitration clause but, in an effort to avoid preemption by the Assembly member Federal Arbitration Act (“FAA”), added that any such agreement would be enforceable.

Ikuta, now joined by Fletcher, said that “the FAA preempts a state rule that discriminates against arbitration by discouraging or prohibiting the formation of an arbitration agreement,” and declared:

“Because the FAA’s purpose is to further Congress’s policy of encouraging arbitration, and AB 51 stands as an obstacle to that purpose, AB 51 is therefore preempted.”

AB 51 added §432.6 to the Labor Code. It provides in subd. (a):

“A person shall not, as a condition of employment, continued employment, or the receipt of any employment-related benefit, require any applicant for employment or any employee to waive any right, forum, or procedure for a violation of any provision of the California Fair Employment and Housing Act…or this code, including the right to file and pursue a civil action or a complaint with, or otherwise notify, any state agency, other public prosecutor, law enforcement agency, or any court or other governmental entity of any alleged violation.”

Subd. (b) bars retaliation against employees who decline to agree to arbitration and, in an attempt to avoid preemption by the FAA, specifies in subd. (f): “Nothing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act….”

Labor Code §433 renders it a misdemeanor to violate AB 51.

The Court held “under California law, an employee can ‘consent’ to an employment contract by entering into it, even if the contract was a product of unequal bargaining power and even if it contains terms (such as an arbitration provision) that the employee dislikes, so long as the terms are not invalid due to unconscionability or other generally applicable contract principles.”

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