If your business operates in California, you need to be aware of AB 51, a law that will take effect January 1, 2020.  AB 51 precludes employers from requiring any applicant or employee, as a condition of employment, continued employment, or the receipt of any employment-related benefit, “to waive any right, forum, or procedure” for a violation of the Fair Employment and Housing Act (FEHA) or the Labor Code.

Section 432.6 of the law goes further to provide that requiring employees to opt out of an arbitration agreement to avoid being bound, or to take any affirmative action to preserve their rights, is “deemed a condition of employment.”  Accordingly, even arbitration agreements with opt-out provisions are unlawful.  Employers who violate AB 51 could be subject to criminal liability.

However, a California Federal Court is now considering whether the Federal Arbitration Act (hereinafter “FAA”) preempts state laws disfavoring the formation or enforcement of arbitration agreements.  On December 6, 2019, the U.S. Chamber of Commerce challenged AB 51 in the Eastern District Court of California.  Chamber of Commerce of the United States v. Becerra, Case No. 2:19-cv-2456 KJM DB.

The Chamber of Commerce is seeking declaratory and injunctive relief to preliminarily and permanently enjoin the state of California from enforcing AB 51 as applied to arbitration agreements that are covered by the FAA.  The Chamber asserts that AB 51 violates the Supremacy Clause of the United States Constitution because it conflicts with the FAA, a federal law that treats arbitration agreements as “valid, irrevocable, and enforceable.”  9 USCS § 2.  The suit seeks not only a declaration that the FAA preempts AB 51, but it also seeks a declaration that the FAA protects both enforcement and formation of arbitration agreements.  This argument is consistent with prior case law.   Kindred Nursing Ctrs. Ltd. P’ship v. Clark, 137 S. Ct. 1421, 1428 (2017).

Until the federal court renders a decision, employers operating in California should keep an eye out for any developments regarding AB 51.  Employers may wish to suspend the implementation of new arbitration agreements until the FAA’s statutory interpretation and preemption issues are authoritatively resolved.

Stay tuned for developments on this law.