On October 10, 2019, Governor Gavin Newson signed into law AB 51, which bans the use of mandatory arbitration agreements in employment contracts beginning on January 1, 2020.
Previously, an employer was able to require employees and prospective employees to agree to arbitration to resolve almost any and all disputes between the employee and the employer as a term of their employment. Employers could have employees waive the right to a jury trial, the right to court costs, and other expenses, provided that the employer paid for the expenses of the alternative dispute resolution.
This change is important for several reasons; employers will now be liable for more expenses related to dispute resolution, may be subject to additional criminal liability and be subject to more aggressive litigation from employees.
With arbitration agreements in place, employers were allowed to control many of the costs associated with the dispute resolution process. Litigation is very expensive, and the requirement to pay filing fees, jury fees, expert fees, and other court costs, often add a significant expense to this course of resolution. Cases that are handled in arbitration often get a resolution at a fraction of cost of litigation, as arbitrators are usually more attentive to the immediate case at hand, and the case is not bound by the clutter of an overworked judicial system. As a by-product, cases which are resolved faster, tend to resolve for smaller sums as there is less opportunity for attorneys’ fees to swell as in a stagnating case. While not inexpensive, arbitration generally did not disadvantage employees but did allow employers to mitigate costs and expenses if they were found to be liable for the employee’s claims.
This new law may be in direct conflict with and preempted by, the Federal Arbitration Act, which is created by the supremacy clause of the United States Constitution. The constitutional conflict created by AB51 will likely land the law in years-long litigation as it makes its ways through the appellate courts.
Regardless of the future of AB51, employers acting now to safeguard their businesses against future litigation must choose between several underwhelming options. Since AB51 was signed into law without an explicit retro-active effect, there is a strong legal argument that contracts entered into prior to January 1, 2020 with arbitration clauses will be honored, unless the contract extends beyond 1/1/20. Employers who chose to continue their arbitration clause practices may be protected if AB51 is struck down in the courts, but run the chance of being found in violation of AB51 and criminally liable in the meantime.
Employers may want to stop implementing arbitration clauses in their employment contracts after January 1, 2020. If AB 51 is struck down in the future, it is still an employer’s right to update and alter an at-will contract as the business requires. This right will allow employers to reinstate arbitration clauses when there is more certainty as to their enforceability and less liability for employers.
Employers who already have written employment contracts are encouraged to audit their contracts in the next two months and determine what is the best course of action for their business. No two employers face the same circumstances, and an assessment of the risks and benefits should be made on an individual level. Be sure to consult with your HR Expert on the matter.