Major Win for Employers in the Mandatory Arbitration Agreement Battle

Employers often ask employees to sign arbitration agreements as a part of the hire packet. Arbitration is a private process when parties choose a neutral third party to resolve the dispute instead of going to court. It is a less formal procedure in which there is no jury and no right to appeal the arbitration award. Because arbitration is a private procedure, it is more confidential. Employers also prefer arbitration because they believe it would be more favorable to them and reduce the risk of employee class actions. Federal Arbitration Act (FAA) protects arbitration agreements and formalizes the national policy of favoring such agreements.

In October 2019, California made an interesting move (AB51 Bill) to circumvent the FAA by penalizing employers if they require arbitration agreements as a condition of employment, yet still making those arbitration agreements enforceable once they are made. See California Labor Code Section 432.6 (preventing employers from requiring employees or job applicants “as a condition of employment" to waive “the right to file and pursue a civil action or complaint.”).

AB51 “resulted in the oddity that an employer subject to criminal prosecution for requiring an employee to enter into an arbitration agreement could nevertheless enforce that agreement once it was executed.” Chamber of Commerce of the United States v. Bonta, No. 20-15291, at *11 (9th Cir. Feb. 15, 2023).

On February 15, 2023, the Ninth Circuit Federal Appeals Court found in Chamber of Commerce of the United States v. Bonta that FAA preempted AB51, making AB51 an invalid law. The Court reasoned that AB51 discriminated against arbitration by discouraging or prohibiting the formation of an arbitration agreement. By imposing criminal penalties, AB51 inhibited employers' willingness to create an arbitration contract with employees. This is "antithetical to the FAA's liberal federal policy favoring arbitration agreements." Id. at *25 (citations omitted).

The Bonta decision is great news for employers, at least for now (the state may still seek a rehearing en banc, or seek review of this decision by the Supreme Court of the United States). Employers in California now have the freedom to require employees to sign mandatory arbitration provisions as a condition of employment. However, in opting for arbitration, employers should carefully consider all aspects. Though arbitration may offer better confidentiality and faster resolution, employment arbitrations can be more expensive for employers because private arbitrators often charge high hourly rates, the fees and costs of the arbitration are usually on the employers, and certain procedural tools are less likely to be successful (for example, sanctions for frivolous claims).

Another thing employers should consider in an arbitration agreement is its enforceability. Even with the Bonta decision, an arbitration agreement may still be enforceable on other grounds. In Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000), the California Supreme Court held that employer-employee arbitration agreements may be “unconscionable” and unenforceable if they do not include provisions for: (1) a neutral arbitrator; (2) all remedies allowed under statutes; (3) adequate discovery procedures; (4) a written and well-reasoned arbitration decision; and (5) the employer’s payment of all costs unique to the arbitration process itself.

Employers should reevaluate and review their arbitration agreements with employees to ensure its enforceability and optimal protection of employer's rights and remedies.