California companies are best advised to remove arbitration provisions from form employment agreements. A September 2021 court decision reinstates a law invalidating such provisions, and leaves unclear whether requiring employees sign arbitration provisions gives rise to criminal and civil liability.
Background
Arbitration has always been known as being favorable to employers. Whether arbitrators have an affinity to employers vs. employees is not clear. What is clear is that arbitrators are less threatening than a jury because they are less likely to award mega-damages for minor infractions, as a jury might. As a result, many form employment agreements require disputes be resolved exclusively by arbitration.
In January 2020, Governor Newsom signed into law AB 51, which prohibits employers from inserting arbitration provisions in future employment agreements. AB 51 even makes doing so a misdemeanor. The law has a notable exception, for arbitration agreements governed by the Federal Arbitration Act (“FAA”), a federal law that promotes and protects arbitration. As soon as AB 51 was enacted, the Chamber of Commerce sued in federal court arguing that the law violates the FAA. The Chamber was successful in securing an injunction and shelving the law. California appealed.
The Recent Decision
California appealed to the 9th Circuit and secured a victory of its own. In the recent September 2021 decision, the 9th Circuit reinstated the law, in-part because by its own terms it only prohibits pre-contract activity (the attempt to require a candidate for employment sign...) and in-part because it does not invalidate arbitration provisions protected by the FAA.
As a result of the new 9th Circuit decision, California employers are left asking which arbitration provisions are prohibited and which are protected. The long answer is, it likely depends on what the employee does. The Supreme Court in another case, Allied-Bruce Terminix Companies, held that the FAA reaches every contract that Congress can regulate under the Constitution’s Commerce Clause, but that excludes contracts that have no connection to interstate commerce. Thus, if the employee at issue is mostly talking to vendors and customers in California and/or delivering goods or services to Californians, without any ongoing contacts across state lines, AB 51 says they cannot be forced to sign an arbitration provision and the FAA does not apply. On the other hand, if the employee’s tasks regularly involve contacts across state lines, while AB 51 says the employee cannot be forced to sign, if the employee signs anyway, the FAA says the agreement is enforceable.
But, determining whether an employee's tasks are sufficient to involve interstate commerce, and risking liability for pre-contract activity, is too thorny for most if not all employers. So, employers are best advised to remove arbitration provisions until there is further clarity on the issue.
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