9th Circuit Largely Upholds California's Ban on Arbitration Agreements as a Condition of Employment

Update October 5, 2021: This advisory has been updated to include the latest information on arbitration agreements under the California Labor Code.

On September 15, 2021, the 9th Circuit in Chamber of Commerce of the US v. Bonta reversed (2-1), in part, a preliminary injunction and held that California Labor Code section 432.6—which prohibits employers from requiring employees to agree to arbitration agreements as a condition of employment on or after January 1, 2020—can, in large part, be enforced.

The effect? In California, employers cannot require employees to agree to arbitration agreements as a condition of employment, but employees may voluntarily agree to do so. (See our previous blog post on this legislation here.)

Background

AB 51 added section 432.6 to the California Labor Code, which prohibits employers from requiring applicants or employees to waive any right, forum, or procedure for the violation of the Fair Employment and Housing Act (FEHA) or the Labor Code as a condition of employment or continued employment, or receipt of any employment-related benefit. The law does not prohibit arbitration of employment claims but makes clear any agreements to arbitrate must be voluntary.

On December 30, 2019, two days before the new law was to take effect, a federal district court granted a temporary restraining order. A preliminary injunction was later granted on January 31, 2020. (See our blogs post on the temporary restraining order and preliminary injunction here and here.)

The Court's Ruling

In reversing the preliminary injunction, the 9th Circuit relied on principles of preemption and statutory construction. The court held that the Federal Arbitration Act (FAA):

• (1) Does not preempt Labor Code section 432.6 insofar as it applies to prohibitions on making arbitration agreements a condition of employment; but
• (2) Does preempt the statute from imposing any civil or criminal penalties if an employee actually signs an arbitration agreement.

Note that employers can still be subject to civil and criminal penalties if an employee is fired for not signing an arbitration agreement, or an applicant is not hired because they refused to sign the arbitration agreement.

As Justice Ikuta noted in her forceful dissent, the majority's decision results in a strange paradox: If an employer offers an arbitration agreement to a prospective employee as a condition of employment, and the prospective employee executes the agreement, the employer may not be held civilly or criminally liable, but if the prospective employee refuses to sign and the employer refuses to hire that prospective employee on that basis or fires an employee for not signing, the employer is subject to civil and criminal liability.

Takeaways for Employers

The Bonta decision will likely either be appealed to the United States Supreme Court or a petition for an en banc review may be filed. However, at this time, employers should still consider the following:

• California Labor Code section 432.6 only applies to arbitration agreements that were entered into, modified, or extended on or after January 1, 2020.
• If you required employees to sign arbitration agreements as a condition of employment after January 1, 2020, we suggest consulting with counsel to determine whether new agreements should be presented in compliance with California Labor Code section 432.6.
• In order to comply with California Labor Code section 432.6, employers should not mandate that employees sign arbitration agreements as a condition of employment. Employers should consider making the arbitration agreement a stand-alone document (i.e., not a part of an employment agreement); including specific language in the arbitration agreement that makes it clear that entering into the arbitration agreement is voluntary and not a condition of employment or an employment-related benefit; and, specifically stating that signing the arbitration agreement is voluntary and there will be no retaliation if an employee chooses not to sign the agreement. Employers should also review their new hire and other employment documents to ensure that consent to arbitration is not a condition of employment or continued employment.