California Employers Can Require and Enforce Arbitration Agreements

By Swerdlow Florence Sanchez Swerdlow & Wimmer

February 23, 2023

California employers got help last week from a federal appeals court ruling that the Federal Arbitration Act (“FAA”) preempts California Assembly Bill 51 (“AB 51”).

AB 51 was a 2019 California law that prohibited employers from requiring job applicants or workers to sign arbitration agreements as a mandatory condition of their employment.  In California and other states, attempts to prevent employers from requiring arbitration agreements had been repeatedly struck down.  The U.S. Supreme Court in several cases, including a 2017 case called Kindred Nursing Ctrs. v. Clark, ruled that the FAA prohibited states from discriminating against arbitration agreements.  To try to get around this, AB 51 was intentionally structured so that arbitration agreements would remain enforceable, but the state would make the act of forcing employees to enter into arbitration agreements a criminal offense.

In its initial decision in 2021, a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit partially upheld AB 51 in U.S. Chamber of Commerce v. Bonta.  Their decision created an inexplicable dynamic whereby employers and employees could enforce arbitration agreements they may have entered into, but it remained unlawful for California employers to condition employment on a signed arbitration.

In August of 2022, the Ninth Circuit withdrew its 2021 ruling to reconsider the issue.  In last week’s decision, the Ninth Circuit decided that the purpose of the FAA was to encourage arbitration, but the criminal penalty in AB 51 discouraged arbitration.  As a result, the appeals court revised its initial ruling and held that AB 51 was preempted for arbitration agreements covered by the FAA.

Following the decision, most California employers can now condition employment on their employees signing arbitration agreements without any of the confusion or penalties of AB 51.  In light of this decision, we continue to recommend that California employers with employees covered by the FAA should strongly consider the use of arbitration agreements that contain class-action and representative-action waivers.  This is one of the strongest risk-mitigation measures presently allowed for employers.

Contact your SFSS&W attorney if you have any questions or would like to update your arbitration agreements.

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