California Court Puts Arbitration Agreement Bill (AB51) on Hold

Under Assembly Bill 51 (AB51), a new California law signed by Governor Newsom, employers will no longer be able to compel current or prospective employees from agreeing to arbitration for claims brought under California laws. This law was challenged as being in direct contradiction with the Federal Arbitration Act, and would, therefore, be preempted. In late 2019, a Federal Court ordered a preliminary injunction barring the enforcement of AB51.

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Arbitration procedures in construction

Arbitration is commonly used in construction as a method of alternative dispute resolution. It is a private process to resolve disputes without having to submit the issue to the court system. Since the enactment of the Federal Arbitration Act (FAA) of 1925, courts heavily favor the arbitration system stating that arbitration agreements should be held on equal footing with other contract types. Under the FAA, arbitration awards are valid, enforceable, and binding on all parties involved.

These arbitration agreements are particularly prevalent in the construction, both in employment and construction contracts. The California construction industry should keep a close eye on the progress of AB51. If enacted, the ability to include arbitration clauses in an employment contract can be seriously affected.

What California’s Arbitration Agreement Bill (AB51) contains

October 10, 2019, California Governor Gavin Newsom enacted Assembly Bill 51 (AB51) that aims to prohibit the use of mandatory arbitration agreements as a condition for employment. The stated purpose of the bill is “to ensure that individuals are not retaliated against for refusing to consent to waive their rights and the procedures under FEHA and the Labor Code as well as to ensure that any contract relating to those rights and procedures be executed as a matter of voluntary consent.”

The AB51 bill would essentially ban employers from requiring prospective or current employees to “waive any right, forum, or procedure for violation” of the CA Fair Employment and Housing Act (FEHA) or the CA Labor Code. In addition to that, it also provides an enforcement action for violations under the FEHA, making noncompliance with AB51 a crime.

How AB51 would amend the current CA Labor Code

Enacting AB51 would add the following language to the California Labor Code:

  • (a) A person shall not, as a condition of employment, continued employment, or the receipt of any employment-related benefit, require any applicant for employment or any employee to waive any right, forum, or, procedure for a violation of any provision of the California Fair Employment and Housing Act … including the right to file and pursue a civil action or a complaint with, or otherwise notify, any state agency, other public prosecutor, law enforcement agency, or any court or other governmental entity of any alleged violation.
  • (b) An employer shall not threaten, retaliate or discriminate against, or terminate any applicant for employment or any employee because of the refusal to consent to the waiver of any right, forum, or, procedure for a violation of the California Fair Employment and Housing Act or this code, including the right to file and pursue a civil action or a complaint with, or otherwise notify, any state agency, other public prosecutor, law enforcement agency, or any court or other governmental agency of any alleged violation.
  • (f) Nothing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act (9 USC §1 et seq.).

Legislative history of CA AB51

Temporary restraining order issued

Initially, AB51 was scheduled to go into effect on January 1, 2020. However, on December 9th, the US Chamber of Commerce challenged the bill, claiming that AB51 was preempted by the FAA.  The court declared that if the statute were in effect, and preempted by the FAA, it would disrupt the creation of employment contracts, especially given the potential of employers to face criminal liability.

Therefore, the court issued a temporary restraining order (TRO), blocking the enforcement of AB51. The hearing on the motion for a preliminary injunction was set for January 10, 2020.

Preliminary injunction issued

The case in question is Chamber of Commerce of the United States et al. v. Becerra et al. The court in this case ultimately granted the request for the preliminary injunction based on two main grounds.

The first being that AB51 treats arbitration agreements differently from other contracts. Under the FAA, businesses are free to execute contracts as they choose, and the conditions are typically admissible and enforceable. If AB51 was enforced, then employers requiring arbitration would then be subject to civil actions and criminal penalties

The second main reason the preliminary injunction was granted is that the bill conflicts with the general purpose and objectives of the FAA. The FAA eas enacted to promote the use and validity of arbitration proceedings. However, AB51 achieves the opposite result by criminalizing the formation of arbitration agreements.

Pending AB51 decision, California arbitration agreements allowed

The injunction will stand until a final judgment is rendered. However, it’s likely that the State of California will appeal the decision. For now, as the preliminary injunction stands, California employers can continue to include arbitration clauses in their employment contracts. Construction companies should still review their contracts to ensure that the agreement is 100% in compliance with the FAA requirements.

We will closely monitor the progress of AB51 and keep you posted on any updates.