The Ninth Circuit Upholds California Law Prohibiting Employers from Requiring Arbitration Agreements

Many employers require employees to sign arbitration agreements as a condition of employment. At least for now, the Ninth Circuit Court of Appeals has upheld workers’ right to refuse to sign away their right to sue in court – a huge, although perhaps temporary, blow to arbitration clauses in employment agreements in California. 

On September 15, 2021, the Ninth Circuit Court of Appeals held that California’s AB 51 law, which makes it illegal for an employer to require employees to arbitrate certain employment claims, was not preempted by federal law. If the decision is not reversed by the Supreme Court, it will have a huge impact on employees who would otherwise be required to sign arbitrations agreements as a condition of employment. These employees may be able to preserve their right to sue in court and have their case heard by a jury of their peers.  

What is Arbitration? 

Arbitration is an “alternative dispute resolution” system in which parties, including employees and employers, hire a third party neutral (an arbitrator) to resolve legal claims against the other party. Unlike suing in court, in an arbitration (1) you lose the right to have your claims heard by a jury, (2) the arbitrator is not required follow the rules of evidence, and (3) there usually is no right to appeal, meaning there is nothing you can do about an incorrect ruling. Learn more about arbitration versus court proceedings here

Is Arbitration Mandatory? 

Arbitration agreements are legally binding contracts between you and your employer that prevent you from filing suit in court. Until AB 51, under state and federal law, an employer could legally require their employees to arbitrate any dispute and waive the right to court as a condition of employment, whether the arbitration provision was located in an employment contract or in an employee handbook. 

This meant that an employer could force you to sign an arbitration provision and, under some circumstance, force you to arbitrate even if you didn’t sign but continued to work. Until AB 51, an employer could validly terminate you for not signing an arbitration agreement or opting out of an employer mandated arbitration provision.  

Is Arbitration Bad for Employees? 

Although there are always exceptions, the answer is yes: arbitration is bad for employees. Studies have shown that employees compelled to arbitration have their claims dismissed more frequently, lose at hearing more often, and even when they win, they tend to win far less money than they would have in front of a jury. (See this study.) While you hear about large jury verdicts on television, these types of awards are almost unheard of in arbitration. 

Not only do employees do worse in arbitration, but the data also suggest that the “repeat player problem” causes arbitrators to implicitly or explicitly favor large companies that send them repeat business, often in the tens of thousand of dollars per year. Many arbitrators believe that if they award huge damages against a company, they will lose the company’s business as well as any business from the law firm representing the company. 

Because arbitration is generally better for employers, many include mandatory arbitration agreements in employment contracts or in their employee handbooks to force employees into binding arbitration and keep them from filing in court. Don’t be fooled—employers do this because they think it means they will have to pay less money when they break the law.  

California courts have noticed these problems for employees in arbitration: “the fact that the business organization imposing the arbitration clause is a repeat player in the arbitration system, while the consumer or employee is not, raises the potential that arbitrators will consciously or unconsciously bias their decisions in favor of an organization or industry that hires them regularly as an arbitrator.” Engalla v. Permanente Med. Grp., Inc., 15 Cal.4th 951, 988 (1997).  

To be clear, you can still “sue” if you sign an arbitration agreement, but your claims will not be heard by a judge and jury, but rather by a third-party arbitrator, who is more likely to rule against your or award you less money in damages.  

How Does AB 51 Change Arbitration in Employment Cases? 

A few years ago, the California Legislature enacted AB 51, which prohibited employers from requiring employees to agree to arbitrate harassment and discrimination claims. AB 51 gave employees the right to refuse to sign arbitration agreements and provided that employers could not legally retaliate against employees who exercised this right. This means that, under the law, you could not be fired for refusing to sign an arbitration agreement. 

However, business interests sued to stop the law from taking effect, and it was never implemented. That changed today, when the Ninth Circuit Court of Appeals found that AB 51 is legal and does not conflict with the Federal Arbitration Act (FAA). If the Ninth Circuit’s decision is upheld on appeal to the Supreme Court, it means that employees may refuse to sign arbitrations agreements as a condition of employment—a huge win for employees who may now keep their claims in court and in front of a jury. 

It is important to note that the law as interpreted by the Ninth Circuit only applies going forward, that is, it does not undo or reverse arbitrations agreements previously entered into by employees even if they were required as a condition of employment at the time. Whether you can rescind an arbitration agreement is a question that will need to be resolved in future cases.  

Our Employment Lawyers Fight for California Workers 

At King & Siegel LLP, we have helped hundreds of workers hold employers accountable through legal actions. If you believe you have claims against your employer and want to know if and how you can bring them in court, our attorneys are here to help. 

Need legal help? We provide free, confidential consultations to California workers. You should contact us as soon as possible to make sure your claim is still within the time limits set by law. Contact us today through our website or give us a call at (213) 214-3757 to schedule a free consultation. 

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