Mandatory arbitration agreements may no longer be enforceable

AB 51 bans mandatory employment arbitration agreements. 

(Part 2 of a four-part series.)

AB 51, which was signed into law by Gov. Gavin Newsom (D) on October 10, adds a new Section 432.6(a) to the California Labor Code, banning any agreement to “waive any right, forum, or procedure for any violation” of state labor laws, “including the right to file and pursue a civil action or complaint,” imposed “as a condition of employment, continued employment, or receipt of any employment-related benefit.”


The legislation effectively overrules the April 2019 decision of the California Court of Appeal in Diaz v. Sohnen Enterprises, which held that “when an employee continues his or her employment after notification that an agreement to arbitration is a condition of continued employment, that employee has impliedly consented to the arbitration agreement.”

The new statute also bans so-called "opt-out" agreements. New Section 432.6(c) provides that “an agreement that requires an employee to opt out of a waiver or take any affirmative action in order to preserve their rights is deemed a condition of employment.”

Only express assent can support an arbitration agreement, and subsection (b) of the new statute bars any form of retaliation against employees who decline to consent. The language of the anti-retaliation provision goes so far as to ban “discriminat[ion] against” non-consenting employees -- raising the possibility that the statute would prohibit employers from conditioning employment benefits on assent to an arbitration program.

Which agreements are covered?

Whether the new statute applies only to new agreements, or to existing ones as well, remains to be seen. Subsection (h) provides that it “applies to contracts for employment entered into, modified or extended on or after January 1, 2020.” But it is unclear whether a pre-existing contract is “extended” when the consideration on which it is based is continued employment. If so, mandatory arbitration agreements that are perfectly lawful on New Year's Eve 2019 might become unlawful when the clock strikes midnight.

A decision from last April in the Court of Appeal suggests that AB 51 might not be so interpreted. At issue in Ryze Claim Solutions LLC v. Superior Ct. was a choice-of-forum provision in an employment agreement that required the plaintiff to bring his wrongful termination suit under the California Fair Employment and Housing Act in Indiana. The choice-of-forum provision would have been invalid under Labor Code Section 925, which applied to “contract[s] entered into, modified or extended on or after January 1, 2017.”

The plaintiff's employment agreement had a one-year term, with automatic extensions in May of each year. The plaintiff was terminated in March 2017 -- after his last extension in May 2016 but before the extension of his contract in May 2017. The Court of Appeal ruled that Section 925 did not apply because the last renewal of the plaintiff's contract occurred before January 1, 2017.   

Ryze Claim Solutions suggests that “extended” in the new Labor Code Section 432.6(h) refers to an express "reaffirmation" of a contract and not a mere "continuation." Where an arbitration agreement remains in effect for the duration of the employment relationship, it is not “extended” at any point after formation. Of course, any modification to the terms of the agreement after January 1, 2020, would bring AB 51 into play.

Exemption that swallows the rule?

AB 51 may turn out to have little practical impact despite its sweeping intent.  Subsection (f) provides that it does not apply to agreements governed by the Federal Arbitration Act. There is, accordingly, an important intersection between AB 51 and California’s rule barring class relief waivers in arbitration agreements. 

In Gentry v. Superior Court, the California Supreme Court held that class waivers are unenforceable. But in Iskanian v. CLS Transportation, the Court acknowledged that the FAA controlled, thus creating California’s two-track regime: class waivers are valid in FAA-governed agreements, but not otherwise.

AB 51 fits within the same rubric, and is not a substantial impediment to the enforcement of class-relief waivers, which are often the primary reason for maintaining an employee arbitration program.

California employment laws keep employers up at night, wondering what is coming next. There always seems to be something. From new statutes to new regulations to new court decisions, we will keep you up to date on developments in the areas of wage and hour, discrimination, leaves of absence, retaliation, class actions, PAGA, and arbitration. We’ll also provide you with practical information on how to update your policies and employment practices. Please subscribe to keep current.


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