Longship Group

Employment arbitration is being hotly contested

12.05.22 07:30 PM By CRM

Placed in the crosshairs of a conflict between state and federal labor laws, California employers must assess and limit their risks. 


After being rebuffed by former Governor Jerry Brown, arbitration opponents in the state legislature found a more sympathetic ear with California’s new Governor Gavin Newsom, who signed Assembly Bill 51 into law in October of 2019. 


A similar bill that would have effectively banned most arbitration agreements in employment contracts was vetoed in 2018 by Brown, who determined it violated federal law. But with some tweaking, this year’s version received Newsom’s support and will go into effect in January of 2020. 


The law is certain to be challenged in the courts by employers and federal regulators. That process is likely to take months or even years. Meanwhile, the requirements of the state’s new restrictions on the use of arbitration create significant liabilities for employers who don’t comply. 


Arbitration is a private process where disputing parties agree that one or several individuals can make a decision about the dispute after receiving evidence and hearing arguments. The arbitration process is similar to a trial in that the parties make opening statements and present evidence to the arbitrator. 


Used increasingly in employment disputes, arbitration is considered to be a less expensive and time-consuming process than a court trial. It’s promoted as a process that better protects the privacy of disgruntled employees. 


But in the #MeToo era, the downside of arbitration has received a lot of attention. For example, a woman who signs such an agreement and later says she has been sexually harassed would have to submit to a private arbitration. Commonly, she would also have to sign a nondisclosure agreement upon settlement. 


As a result, arbitration may protect the “privacy” of the abuser and the company more than that of the employee. The public has been outraged by media reports of high-profile cases shrouded in secrecy by arbitration and nondisclosure agreements. 


How “voluntary” and fair arbitration agreements are has been the focus of many lawsuits. In November, the U.S. Court of Appeals for the 11th Circuit, which has jurisdiction over Alabama, Florida and Georgia, ruled that a company’s arbitration agreements violated the federal Fair Labor Standards Act because of their fee-sharing requirement, which placed a heavy financial burden on employees and prevented them from recovering costs. Even if an employee opted to take a complaint to arbitration and won, some agreements required the employee to pay his or her own attorney fees. 


AB 51 bans employers from requiring employees or applicants to waive any rights, forum, or procedure under the state Fair Employment and Housing Act or Labor Code as a condition of employment. It also prohibits employers from retaliating or threatening employees who refuse to waive such right. 


While federal law prohibits states from targeting the enforcement of arbitration agreements, the proponents of AB 51 sought to head off a legal challenge by including the wording: “Nothing in this [law] is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act.” 


Adding confusion to the state-federal conflict is the date the new law will go into effect. It places restrictions on “contracts for employment” entered into, modified or extended on or after Jan. 1, 2020. It’s unclear if the law applies to older, but extended, agreements. 

State and federal courts and legislators must intervene to resolve conflicts. But in the meanwhile, California employers should review: 

  • Existing arbitration agreements with legal advisers to ensure that they comply with federal law and recent court rulings. 
  • How arbitration agreements are explained to applicants and employees. Are agreements merely included in employee handbooks, or briefly noted in the fine print of contracts? Are they clearly explained and do they require specific acknowledgements and endorsements? 
  • The purpose for having an arbitration agreement, which should focus on the company’s specific goals and needs. 
  • Risk tolerance. If a company’s policies and agreements are legally challenged, the cost of litigation and potential consequences should be considered.