What happened?

A federal district court has entered a permanent injunction barring the State of California from enforcing Assembly Bill (AB) 51, California’s law that purports to preclude employers from requiring arbitration agreements as a condition of employment, as it is preempted by the Federal Arbitration Act (FAA). 

What are the details?

AB 51 no longer stands as an obstacle to employers that wish to require arbitration agreements as a condition of employment in California, so long as the FAA applies and governs the agreement.

Although the State of California argued that the provisions from AB 51 could be severed, leaving only the ones that did not preempt the FAA, The Ninth Circuit found that AB 51’s provisions could not be salvaged through severance because the statute’s provisions all work together to burden the formation of arbitration agreements and, in any event, there was no authority in the legislation to sever the penalty portions of the law.

While the scope of the FAA is broad and generally applies to any business involved in interstate commerce, it also specifically exempts from its coverage “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce. (9 U.S.C. § 1.)”, meaning that contracts that fall into this exemption will not be covered.

Business Considerations

• You can now require an employee or prospected employee to sign an arbitration agreement as a condition of employment where the arbitration agreement at issue is governed by the Federal Arbitration Act but should consider the statute exemption.
• Given the complexities of the law regarding mandatory arbitration agreements, you are encouraged to consult an employment attorney to help you navigate these complex issues. 
• You should consider assessing the need to offer additional consideration in a negotiation if an arbitration agreement is to be enforced.

Resources

• Chamber of Commerce of the USA et al. v. Becerra et al. No. 2:19-cv-02456 (E.D. Cal. Jan. 1, 2024).
• Federal Arbitration Act (FAA)

Source References

• California’s Law Barring Mandatory Arbitration Agreements Permanently Enjoined (Jackson Lewis P.C.)
• California’s AB 51 Permanently Enjoined: Implications for Employers (Gordon Rees Scully Mansukhani, LLP)

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