Court: Employers can’t require arbitration
A federal appeals court revived a labor-backed California law Wednesday that prohibits employers from requiring employees to arbitrate workplace disputes instead of taking them to state regulatory agencies or the courts.
The law, AB51, signed by Gov. Gavin Newsom, was scheduled to go into effect in January 2020 but was blocked in most of its applications by U.S. District Judge Kimberly Mueller of Sacramento, who said it conflicted with a 95-year-old federal law allowing employers to enforce arbitration contracts and prohibiting states from interfering with them. Gov. Jerry Brown had cited the same rationale for vetoing similar legislation in 2015 and 2018.
But the Ninth U.S. Circuit Court of Appeals in San Francisco said
Wednesday the federal law did not allow employers to require current or prospective employees to agree to arbitration as a condition of keeping their jobs. In a 2-1 ruling, the court struck down provisions of AB51 that imposed criminal penalties on employers for requiring arbitration but upheld the law’s central feature, a ban on mandatory arbitration as a condition of employment.
The California law is consistent with the premise of the 1926 Federal Arbitration Act “that arbitration is a matter of contract and agreements to arbitrate must be voluntary and consensual,” said the majority opinion by Carlos Lucero, a judge from the federal appeals court in Denver temporarily assigned to the Ninth Circuit.
Judge William Fletcher joined Lucero’s opinion. In dissent, Judge Sandra Ikuta derided the California law as a “legislative gimmick” and said it placed an illegal burden on “employers offering arbitration agreements as a condition of employment.”
The state law had taken effect in 2020 for transportation employees in California, because the Federal Arbitration Act does not apply to them. Wednesday’s ruling, if it stands, will apply AB51 to all categories of workers. Arbitration is widely used by employers, and opposed by labor unions, to resolve disputes over wages and working conditions. It is quicker and less expensive than filing complaints with the state Labor Department or suing in court, but it is also more secretive, and arbitrators’ rulings are extremely difficult to overturn on appeal. The procedure also requires cases to be arbitrated individually, as opposed to class-action suits on behalf of many employees.
The U.S. Supreme Court has applied the federal arbitration law broadly and rejected attempts by several other states to limit workplace arbitration. In a 2017 ruling striking down Kentucky’s proposed restrictions on the procedure, the court said states have no authority to “selectively find arbitration contracts invalid because improperly formed.”
But the appeals court said Wednesday that contracts must be voluntary to be valid, so California can allow job applicants and employees to refuse to consent to arbitration without being penalized.
“Congress … did not intend to preempt state laws requiring that agreements to arbitrate be voluntary,” Lucero said.
Ikuta disagreed. The Federal Arbitration Act “preempts laws that ... burden the formation of arbitration agreements,” even when employees enter them because of unequal bargaining power, she said.
The ruling is a victory for workers, said attorney Cliff Palefsky, who filed arguments for the California Employment Lawyers Association, which represents employees. The state law does not invalidate arbitration agreements, he said, but “if someone says, ‘I don’t want to sign,’ they can’t be terminated or disciplined.”
The U.S. Chamber of Commerce, which led business organizations suing to overturn the law, will appeal the ruling, said Daryl Joseffer, its senior vice president and chief counsel.
“Research shows arbitration is more efficient and less costly for everyone,” he said. “Workers and consumers win more money, more often and more quickly through arbitration than litigation. Expensive lawsuits can take years to resolve.”