9th Circuit Decision Makes It Harder for California Employers to Require Employees to Sign Arbitration Agreements as a Condition of Employment
Effective, January 1, 2020, the California legislature had passed a bill, AB 51, making it unlawful for employers to require newly hired employees to sign arbitration agreements as a condition of employment, meaning that it was not a voluntary choice.
Business groups promptly sued to invalidate AB 51. Last year, a federal district judge issued a preliminary injunction barring the state from enforcing the statute, finding that it was pre-empted by the Federal Arbitration Act.
However, on September 15, 2021 the Ninth Circuit Court of Appeals largely reversed that ruling in a split decision, (See Chamber of Commerce v. Bonta, Case: 20-15291, 09/15/21.)
The majority affirmed the portion of the district court judge’s ruling that certain portions of AB 51, namely, the civil and criminal penalties, were pre-empted by the Federal Arbitration Act and can’t be enforced. But, with regard to the key portion of AB 51 – the part barring employers from requiring arbitration agreements as a condition of employment – the majority reversed. It reasoned that “[p]lacing a pre-agreement condition on the waiver of ‘any right, forum, or procedure’ does not undermine the validity or enforceability of an arbitration agreement—its effects are aimed entirely at conduct that takes place prior to the existence of any such agreement.” It concluded that this portion of AB 51 was not preempted by the FAA and is valid.
This may not be the end of the story. The dissent accused the majority of ignoring governing case law and pointed out that the decision creates a circuit split with other federal circuits who had found similar statutes preempted. There is thus a possibility that this decision may be reversed by the Supreme Court
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The takeaway for employers, is that, unless this decision is reversed, they should not require new hired employees sign arbitration agreements as a condition of employment. They may, however, have employees sign voluntary arbitration agreements and consider other ways of inducing employees to sign such agreements, such as providing consideration – such as additional vacation or a bonus. If you are using offer letters or employment agreements that include a clause requiring the signing of an arbitration agreement, please call us to revisit that issue.
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