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Employ workers in California? Review your arbitration agreement

A new law in California bans mandatory arbitration clauses in employment agreements.
By: | November 6, 2019 • 4 min read

Beginning Jan. 1, employees in California won’t be forced to use arbitration as their only avenue to resolve discrimination or sexual-harassment claims, civil-right issues or other employment disputes in the workplace.

In September, California Gov. Gavin Newsom signed a bill into law that bans mandatory arbitration clauses in employment agreements, enabling workers to sue their employer.

“This law includes all claims under the state’s labor codes and California Fair Employment & Housing Act,” says Peter Hering, an attorney at Rutan & Tucker law firm. “A similar statute was passed in New York a few years back that attempted to ban mandatory arbitration agreements in the context of sexual-harassment cases. But the Southern District of New York held it was preempted by federal law [the Federal Arbitration Act, or FAA].”

Hering says the U.S. Supreme Court favors arbitration unless unconscionable actions can be proven, such as employer fraud or deception in the way such agreements are presented to employees. In those cases, they can be invalidated.

While advocates of the #MeToo movement and others are applauding California lawmakers, not everyone is pleased. Employer groups throughout the state like chambers of commerce are expected to challenge the law before it goes into effect, hoping the courts will rule on their side.

Although cases heard by a judge and jury tend to pay out bigger settlements than arbitration, Hering says arbitration does have one big advantage: Employee privacy is better preserved. Once filed, he says, court cases become public knowledge. Some employers use privacy as a bargaining chip with employees to encourage arbitration.

He says companies that employ workers in California need to be prepared. Consider your risk tolerance and develop strategies about how to proceed until the courts make a decision.

“You definitely need to be mindful of this,” Hering says. “If the California law stands, you could run into potential violations that cost a lot of money and find yourself having a lot of arbitration agreements that are no longer enforceable.”

Tug of War

Some believe the California law will create a negative business environment and embolden employees to be more aggressive in filing lawsuits against their employer.

“This is indicative of the ongoing animus of the California legislature toward arbitration in employment,” says Shareef Farag, partner at BakerHostetler law firm.

Farag supports arbitration partly because it creates a faster, more streamlined process. He says it generally take months to resolve cases, while lawsuits can take years. The discovery process, or obtaining evidence from the other side, is also more efficient, which reduces expenses, and both parties usually get to the core of the issue faster than in a court trial.

See also: Harassment in the Workplace Task Force reconvenes 

Although Farag suspects the law will be preempted under the FAA, which exempts transportation workers and applies to businesses engaged in interstate commerce, he says, some HR professionals are not idle and adding either an opt-out clause or a voluntary waiver in their agreement. But that won’t work.

“The new statue says any agreement that requires employees to opt out or somehow voluntarily waive their participation in the arbitration agreement after it’s been imposed is [deemed] a condition of employment and invalid,” says Farag. “That will not save you.”

Instead, try modifying your arbitration agreement before the law goes into effect. Oftentimes, he says, such agreements are one-sided, dated and may be invalidated. He says HR needs to ask the following questions: Does your agreement take away an employee’s ability to pursue certain types of claims? Does it limit the remedies an arbitrator can award? Does it restrict an employee’s ability to obtain certain kinds of discovery?

HR can also search websites of various chambers of commerce in California for updates. See what cases start to shake out and what guidance they’re offering to preserve the enforceability of your arbitration agreement.

“Continue monitoring all of the developments,” Farag says. “It wouldn’t surprise me if other progressive states followed California. I suspect they won’t wait to see what happens because that could take years.”

Related: SCOTUS delivers employer-friendly arbitration decision

Meanwhile, for more risk-adverse companies, HR can consider maintaining but not enforcing the company’s arbitration agreement, adds Danielle Ochs, partner at Ogletree Deakins law firm.

“You may choose to suspend your use of your arbitration agreement,” she says, adding that the safest option is to temporarily exclude them from employee agreements. “Once this is cleared up, assuming the FAA preemption prevails, you can always go to your employees and ask them to enter into this agreement.”

Still, she says, some of the bill’s language is blurry. While it applies to agreements that are entered into, modified or extended after Jan. 1, she says, the word “extended” is ambiguous. Her interpretation is that any employee who signs an arbitration agreement before Jan. 1 is still subject to the agreement.

“In the end, I believe the law will be deemed preempted by the FAA,” Ochs says, adding that the bill will then be undermined. “There will be very little left of the bill.”

Carol Patton is a contributing editor for HRE who also writes HR articles and columns for business and education magazines. She can be reached at [email protected]

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