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Effective January 1, 2027, California employers will no longer be able to enforce an arbitration agreement under California law if the agreement is unenforceable under the Federal Arbitration Act (FAA). The change brings California’s arbitration law more closely in line with federal law.
Key Takeaways
- If the FAA applies to an arbitration agreement and the agreement is unenforceable under the FAA, it cannot be enforced under California law instead.
- Some workers, including certain transportation workers involved in interstate or international commerce, are exempt from the FAA.
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An FAA exemption does not automatically make an arbitration agreement unenforceable. Instead, California law will determine whether the agreement can be enforced.
- Employers should clearly identify which law governs their arbitration agreements and ensure their agreements comply with applicable federal and state requirements.
What does this mean for employers?
California employers should review their existing arbitration agreements before January 1, 2027, particularly if they employ workers who may be exempt from the FAA.
Employers should work with counsel to confirm that their agreements clearly address governing law, which claims are subject to arbitration, and any restrictions on representative proceedings. Agreements governed by the FAA should also be reviewed to ensure they meet federal enforceability requirements.
For many employers, this change may not require a new arbitration agreement, but it is best practice to review existing agreements and confirm that they remain enforceable under the applicable law.
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