Can you still require your employees to arbitrate employment disputes? The answer to that question is changing quickly at both the federal and state level, and is especially complicated for California employers.

What is arbitration?

Arbitration is a method of alternative dispute resolution where a neutral arbitrator settles a dispute without involving the court system. Unlike a court case, arbitrations are non-public, which can be attractive for employers who want to protect the reputations of their businesses. Arbitration agreements often contain non-disclosure provisions, which further restrict employees from disclosing any details about the facts and circumstances of their claim. Unfortunately, these requirements that employees avoid the court process and keep quiet about their employment disputes have tended to perpetuate sexual harassment and assault in the workplace by limiting the ability of survivors to litigate their claims–or even just to be heard.

What are the current laws regarding arbitration agreements in the United States?

The Federal Arbitration Act (FAA) is the federal law governing enforceability of arbitration agreements and their binding effects. Essentially, the FAA says that if you enter an arbitration agreement, you can no longer take your issue to court–it must be arbitrated. Additionally, once an arbitrator issues an award, that award can be legally enforced. The FAA tends to favor the enforcement of arbitration agreements, and it generally preempts any conflicting state laws. This means that if there’s a state law that prohibits the enforcement of an arbitration agreement, but the FAA would permit such enforcement, the FAA generally stands and mandatory arbitration is allowed.

In February 2022, the United States Congress passed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act. President Biden signed the bill into law in March 2022. It went into effect immediately and it applies to all future disputes or claims, putting new limits on arbitration agreements to better protect victims of sexual harassment and sexual assault. This law amends the Federal Arbitration Act (FAA). It essentially gives survivors of sexual assault and harassment the ability to sue their abusers in federal, state, or tribal court, regardless of whether they’ve previously signed an arbitration agreement or some other contract that contains an arbitration provision. The effect of this bill is that the claimant has the option to either arbitrate or go to court regarding claims of sexual harassment or sexual assault.

What’s an employer’s next step?

Employers should review their arbitration agreement form and consider updating it to be consistent with the new federal law. For current arbitration agreements, employers have several options:

  • Do nothing to the arbitration agreements, but don’t attempt to compel arbitration if an employee files a sexual harassment or sexual assault claim.
  • Provide written notice to employees that under the new law, employees may, but are not required to, arbitrate sexual harassment or sexual assault claims, despite the contrary arbitration agreement.
  • Have employees sign a modified or new arbitration agreement consistent with the new law.

What’s going on in California?

The status of mandatory employment arbitration is a bit messy in California right now. In addition to the federal rulings, employers should be aware of two different state laws in California regarding arbitration. Understanding the status of both of these laws is important for employers with employees in California who want to use arbitration. It also gives us a glimpse at the legal issues that are at play in some other states with arbitration bills in the works.

The PAGA saga

The California Private Attorney General Act (PAGA) gives employees the right to sue employers for violations of the California Labor Code–violations like minimum wage, meal and rest breaks, overtime, and dangerous working conditions. A 2014 California Supreme Court decision ruled that employers cannot require employees to arbitrate PAGA claims or waive their right to participate in a representative PAGA claim (where the plaintiff brings a claim on behalf of other employees who are victims of Labor Code violations, similar to a class action suit).

On July 15, 2022, The United States Supreme Court changed that in Viking River Cruises v. Moriana, ruling that employers and employees can agree to arbitrate individual PAGA claims. But the rule prohibiting waivers of representative PAGA claims remains valid.

Importantly, the Court ruled that if an individual PAGA claim is arbitrated, there is no mechanism that would permit the representative PAGA claim to remain in court, so the representative claim must be dismissed. But in a concurring opinion, Supreme Court Justice Sotomayor invited the California Supreme Court to clarify whether PAGA provides standing to pursue only a representative claim in Court. The California Supreme Court recently agreed to hear a case in which it is likely to answer this question.

AB 51

AB 51 provides that employers can’t, as a condition of employment, require employees to arbitrate violations of the California Fair Employment and Housing Act or the California Labor Code. The case challenging AB 51 has a complicated procedural history. After the law went into effect in 2020, it was quickly challenged in court. The lower court found that the law was preempted by the FAA, meaning that employers could still require employees to sign arbitration agreements. The case went up to the Ninth Circuit in front of a three-judge panel. Although one judge dissented emphatically, two judges found that the FAA did not preempt AB 51. Most observers think that if the United States Supreme Court heard this case, they would agree with the dissenting judge. After the three-judge panel’s decision, the United States Chamber of Commerce, which is a party to the case, asked the full Ninth Circuit to review the decision. The Ninth Circuit said that it was going to wait to decide on that request for a rehearing until the Supreme Court issued its decision on Viking River Cruises v. Moriana. After the Supreme Court issued their Viking River Cruises opinion in July 2022, the three-judge panel on the Ninth Circuit decided to withdraw its original opinion, which probably indicates that the Ninth Circuit is now likely to conclude that the FAA does preempt AB 51 in its entirety.

The bottom line is that AB 51 is currently not in effect, and is on hold while the case awaits rehearing at the Ninth Circuit.

What does this mean for employers in California and across the nation?

Although there’s no California law currently in effect prohibiting the employer from requiring arbitration of employment claims, the federal law still applies–and that federal law prohibits arbitration agreements that require arbitration of sexual assault and harassment claims.

If employers want to require California employees to arbitrate individual PAGA claims, the United States Supreme Court has given them the green light. But be careful not to include a waiver of the employee’s right to bring a representative PAGA action. Also, since AB 51 is on pause, employers may lawfully require employees to agree to arbitrate employment disputes for now (except for sexual assault and harrassment claims). Keep your eye on the case deciding the fate of this law and expect more litigation.

There are other states like Illinois, Vermont, New York, Washington, Maryland, and New Jersey that have passed similar laws seeking to limit the use of arbitration with employees. Some of these laws are in the middle of litigation. Employers should be aware that these issues in California arbitration law give us a good preview of the legal issues that are likely to play out in these other states as well.

SixFifty Solutions

To learn more about these new developments in arbitration agreements, watch our free, on-demand, 30-minute webinar.

SixFifty’s Employment Agreements toolset can help companies draft arbitration agreements that always stay up to date with the latest federal and state laws. SixFifty makes creating and maintaining corporate legal documents simple and certain with the only automated legal expertise platform built for the enterprise. But don’t take our word for it! See for yourself by scheduling a demo today.