California's Mandatory Arbitration Ban Is Permanently Halted

Author: Robert S. Teachout, XpertHR Legal Editor

January 18, 2024

Employers in California may continue to require employees and applicants to enter an arbitration agreement as a condition of employment now that a federal district court has permanently enjoined the law that sought to ban the practice.

Passed in 2019 and set to become effective on January 1, 2020, California AB 51 prohibited employers from requiring as a condition of employment or continued employment that employees or applicants "waive any right, forum, or procedure" for a violation of California's anti-discrimination and retaliation law, the Fair Employment and Housing Act. The law essentially banned mandatory arbitration agreements and imposed civil liability and criminal penalties on employers that imposed an arbitration requirement on employees.

On January 10, 2020, a federal district court issued a preliminary injunction pausing enforcement of AB 51's prohibition on mandatory employment arbitration agreements until a lawsuit alleging that the law is preempted by the Federal Arbitration Act (FAA) was resolved.

Following further legal proceedings over three years, the 9^th Circuit Court of Appeals agreed with the lower court on February 15, 2023, that the FAA completely preempted the state law. The Court noted that "the FAA's purpose is to further Congress's policy of encouraging arbitration, and AB 51 stands as an obstacle to that purpose…."

The federal district court on January 1 of this year permanently enjoined enforcement of the law where the alleged "waiver of any right, forum, or procedure" is the entry into an arbitration agreement that is covered by the FAA. While this protects a broad range of employers, the ruling does not apply to employment agreements outside the FAA's protection, which exempts employment contracts of railroad employees, seamen and similar transportation workers who engage in foreign or interstate commerce.

"If your workers aren't engaged in interstate transportation services, like retail or manufacturing, then you are covered by the federal FAA," explained attorney Alex MacDonald, a shareholder with Littler and a core member of its Workplace Policy Institute team. "But if your employees work in one of the gray areas related to interstate transportation, then the employment agreements are subject to state law and AB 51 may apply."