Insight

California Appeals Court Reverses Workplace Arbitration Decision

Labor Code 432.6, a newly proposed set of legislation in California, was recently met with a successful ruling, but state officials are now reversing that decision.

Two people signing documents
GS

Greg Sirico

October 21, 2022 12:00 AM

On August 22, 2022, California’s 9th Circuit Court of Appeals, which previously upheld its ruling, recently withdrew its decision regarding Labor Code 432.6. The law banned mandatory arbitration agreements in the employment context. Two of the three judges presiding over the panel decided to withdraw their prior opinion in the 2019 case of Chamber of Commerce of the United States of America v. Bonta, which sought to prohibit mandatory arbitration as a condition of employment. Section 432.6 prevents employers from requiring current or future applicants to sign arbitration agreements “as a condition of employment, continued employment or the receipt of any employment-related benefit.” Additionally, the law has set in place both criminal and civil sanctions, which aim to root out employers that have retaliated, discriminated, threatened or unlawfully discharged an employee refusing to accept arbitration.

Starting in October of 2019, the California legislature successfully passed and Governor Gavin Newsom signed Assembly Bill (AB) 51, creating Labor Code section 432.6. For decades prior to the passing of AB51, the U.S. Supreme Court has made it an active mission to heavily enforce the provisions of the Federal Arbitration Act (FAA), which requires circuit and district courts nationwide to adopt employment-based arbitration agreements pursuant to laws of the state. As a remedy to the Supreme Court’s pro-arbitration mindset, AB51 was passed in an effort to override this legislative recourse but did not mark the first time a California official voiced their disapproval of arbitration.

In 2018, former Governor Jerry Brown vetoed two prior attempts brought forth by state legislatures to make arbitration in California fully mandatory. Two days before AB51 could take full effect, the U.S. District Court for the Eastern District of California filed a restraining order against the proposed bill, halting the enforcement of the law via preliminary injunction which found the law to be a direct violation of the FAA. Originally set to take effect on January 1, 2020, California state officials immediately appealed this injunction, leaving the matter to be sorted in appeals court.

Christopher Ward, a labor and employment attorney and partner at Foley & Lardner LLP, is currently working at the forefront of the state-based arbitration issue. “I think the more interesting thing that’s probably going on right now is how are the court’s going to ultimately square these kinds of laws with the pre-emptive force of the Federal Arbitration Act. The Supreme Court has been pretty consistent about keeping that scope broad and striking down state laws that would seem to interfere with the scope of the FAA,” stated Ward, as reported by Bloomberg Law.

According to state legal experts, the court’s 2-1 decision is likely to create some confusion moving forward regarding the usage of arbitration agreements under the context of employment in California. On one side of the issue, California-based employers are likely to continue implementing voluntary rather than mandatory arbitration agreements with current or future employees, leaving those who decline to participate free from running the risk of accumulating significant financial penalties. On the other side of the issue, this ruling is a key indicator that certain provisions of Section 432.6 may still apply, especially in situations where employers are seeking to condition employees who refuse to sign arbitration agreements. Despite these major legislative changes, the arbitration dime doesn’t stop there. Multiple states including Illinois, Connecticut, Idaho and Texas are all currently building employment and healthcare arbitration statutes that work to complement the FAA and its provisions rather than work against it, leaving employers and employees alike uncertain of what the future of workplace arbitration will hold.

Headline Image: UNSPLASH/ROMAIN DANCRE

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