California Moves Toward Ban On Mandatory Arbitration of Labor Claims

by Seyfarth Shaw LLP
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On August 31, the California Legislature passed AB 465, aiming to “ensure that a contract to waive any of the rights, penalties, remedies, forums, or procedures under the Labor Code”—such as an arbitration agreement—is “a matter of voluntary consent.” This bill, now before Governor Brown for his approval, raises two big questions: (1) will the Governor sign the bill, and, if he does, (2) to what extent would the new law be enforceable?

The proposed bill would add Section 925 to the California Labor Code, to

  • prohibit companies from conditioning employment offers (or renewals) on the waiver of any Labor Code-related right,
  • require that any waiver of Labor Code protections be knowing, voluntary, and in writing,
  • deem any waiver of Labor Code rights conditioned on employment to be “involuntary, unconscionable, against public policy, and unenforceable,”
  • prohibit retaliation against any person who refuses to waive Labor Code-related rights, and
  • authorize attorneys’ fees recovery for a plaintiff who enforces rights under Section 925.

The bill would not affect the enforceability of other provisions in an agreement that contains an unenforceable arbitration provision. And it would not apply to employees who are represented by counsel in negotiating the terms of such an agreement.

What? Why? How?

You wonder why this legislation is necessary (um, Armendariz)? Or how it is legal (FAA, anyone)? You’re not alone. While the bill’s supporters call it essential for worker protection, its opponents call it unnecessary, unenforceable, and counterproductive.

The bill’s author, Assembly Member Roger Hernández (D-West Covina), introduced the bill with this explanation: “No worker should be forced to choose between a job and giving up core labor rights and procedures. Existing labor laws are meaningless if workers are forced to sign away enforcement of those rights.”

Opponents, including the California Chamber of Commerce, say the bill is unnecessary in light of current law, unenforceable as preempted by the Federal Arbitration Act, and counterproductive because, as a matter of public policy, arbitration is a fair, low-cost avenue to resolve labor disputes: “AB 465 will only serve to increase litigation costs of individual claims, representative actions and class action lawsuits against California employers of all sizes until such legislation can work through the judicial process to be challenged once again.”

Hardly a Boon to Employees

The law hardly seems essential to workers’ rights. Current California law on mandatory, pre-dispute, arbitration agreements already provides these safeguards:

  • a neutral arbitrator, who is to make a written award subject to judicial review,
  • allowance of adequate discovery,
  • the remedies that would be available in court, and
  • the employee relieved of any obligation to pay any more costs than what the employee would have to pay in court.

Nor have proponents of AB 465 shown that arbitration subjects employees to worse outcomes. The bill’s opponents, meanwhile, have pointed to studies showing that arbitration offers better outcomes for employees in less time than traditional litigation.

A cynic might wonder, then, if the bill primarily serves the interests of trial lawyers.

A Textbook Case of Conflict Preemption?

Should the Governor approve AB 465, new Labor Code section 925 would face judicial challenges on preemption grounds. The Federal Arbitration Act declares that contractual agreements to arbitrate disputes are “valid, irrevocable, and enforceable.” And the U.S. Supreme Court has often reminded California about the pesky Supremacy Clause, while invoking the FAA to trump California rules that were hostile to arbitration.

In fact, one anti-arbitration rule the Supreme Court has struck down appears in a predecessor of AB 465—Labor Code section 229. Section 229 purports to invalidate arbitration agreements involving wage claims. After the Supreme Court’s 1987 ruling that the FAA preempts Section 229, that section is now a nullity except in that rare case in which the arbitration agreement does not involve transactions affecting interstate commerce.

The language of AB 365 directly contradicts Supreme Court pronouncements on FAA preemption: the bill (1) would outlaw mandatory agreements to arbitrate Labor Code claims, such as wage and hour disputes, unless that agreement is negotiated by the employee’s attorney, and (2) states that all mandatory agreements to arbitrate Labor Code claims are “unconscionable, against public policy, and unenforceable.” It’s like the Legislature has already written the preemption decision for the Court!

Workplace Solutions

AB 465 is just one step away from becoming California law. Should Governor Brown sign it, its validity will almost certainly be challenged. But with this bill closer to reality, employers should consider its potential implications on their arbitration programs, especially if they are made a condition of employment (as many are).

With that in mind, it is worth pondering:

  • Since AB 465 requires the employer to prove that the employee entered into the arbitration agreement “knowingly and voluntarily,” and that it was not a condition of employment, can the employer establish that proof simply by including a recital that the parties are voluntarily waiving the right to sue in court, and that this waiver is not a condition of employment?
  • Must the employer offer additional consideration to ensure that the arbitration agreement is truly voluntary?
  • Must employers reconsider the methods by which employees enter into arbitration agreements altogether? Is including arbitration agreements in handbooks now completely dead? Is there anything that would make clear that the employee has read and agreed to the arbitration terms?
  • What other policies, e.g., electronic signatures, opt-out methods, etc. can be used to most effectively ensure that employers can make a strong case for knowing and voluntary waiver?

Edited by Julie Yap

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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