STATUS OF ARBITRATION CLAUSES IN CALIFORNIA EMPLOYMENT CONTRACTS AFTER JANUARY 1, 2020 IN LIGHT OF THE CHAMBER CASE AND THE FAA

Here’s the question:  Is an arbitration clause in a California employment contract (between a California employer and a California employee concerning California goods and/or services) still enforceable after the passage of AB 51 (codified in Labor Code §432.6)?  

SHORT ANSWER:  The answer is easy and complicated.  It is easy in one sense:  The answer is no, because a California statute (Labor Code §432.6; effective January 1, 2020) invalidates arbitration clauses in such employment contracts. So the easy answer/solution for California employers after January 1, 2020 is to remove (or simply not include) an arbitration provision because it unenforceable and illegal. 

However, the issue of arbitration in employment contracts is also complicated because a Federal District Court in California (Chamber of Commerce v. Becerra, et al., (2020) preliminarily enjoined (i.e., stopped or prohibited) State of California officials from enforcing section 432.6, holding that the referenced California statute is preempted by the Federal Arbitration Act (“FAA”), which strongly and liberally favors arbitration.  So, when an employment contract is implicated by the FAA, the California law prohibiting arbitration is not currently enforceable. 

The difficulty with the answer to the question is two-fold:  1) it is not always clear when the FAA would apply to employment agreements; and 2) did the Chamber case only enjoin enforcement as to FAA contracts or as all contracts?

The FAA applies to contracts which involve interstate commerce, meaning buying, selling or moving of products, services or money across state borders or among the states.  Unless the California employer is doing work across state borders, the FAA probably does not apply to a California employment contract between a California business and a California resident doing work in California only, so that the Chamber case which enjoined enforcement of Labor Code section 432.6 may not apply to California employers doing work only in California.  “May” is the operative word because there is a bit of uncertainty as to whether the referenced Federal District Court case (and subsequent appeals) will invalidate the law in toto or only as to contracts covered by the FAA. The safest approach for California employers who only do business in California is to not include any arbitration clause in their employment contracts.  The risks to the California employer, if Labor Code section 432.6 does apply and the employer does not comply, include criminal and civil liability. 

For California employers who do interstate business, the Chamber case provides legal authority for you to continue using arbitration clauses (note:  what should be included in an enforceable arbitration clause is the subject of another article). 

LONGER ANSWER:  California Labor Code section 432.6 (the popular name of the legislation is AB 51) became effective January 1, 2020 and provides as follows:

“(a) A person shall not, as a condition of employment, continued employment, or the receipt of any employment-related benefit, require any applicant for employment or any employee to waive any right, forum, or procedure for a violation of any provision of the California Fair Employment and Housing Act (Part 2.8 (commencing with Section 12900 of Division 3 of Title 2 of the Government Code) or this code, including the right to file and pursue a civil action or a complaint with, or otherwise notify, any state agency, other public prosecutor, law enforcement agency, or any court or other governmental entity of any alleged violation.

(b) An employer shall not threaten, retaliate or discriminate against, or terminate any applicant for employment or any employee because of the refusal to consent to the waiver of any right, forum, or procedure for a violation of the California Fair Employment and Housing Act or this code, including the right to file and pursue a civil action or a complaint with, or otherwise notify, any state agency, other public prosecutor, law enforcement agency, or any court or other governmental entity of any alleged violation.

(c) For purposes of this section, an agreement that requires an employee to opt out of a waiver or take any affirmative action in order to preserve their rights is deemed a condition of employment.

(d) In addition to injunctive relief and any other remedies available, a court may award a prevailing plaintiff enforcing their rights under this section reasonable attorney's fees.

(e) This section does not apply to a person registered with a self-regulatory organization as defined by the Securities Exchange Act of 1934 (15 U.S.C. Sec. 78c) or regulations adopted under that act pertaining to any requirement of a self-regulatory organization that a person arbitrate disputes that arise between the person and their employer or any other person as specified by the rules of the self-regulatory organization.

(f) Nothing in this section is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act (9 U.S.C. Sec. 1 et seq.).

(g) This section does not apply to post-dispute settlement agreements or negotiated severance agreements.

(h) This section applies to contracts for employment entered into, modified, or extended on or after January 1, 2020.

(i) The provisions of this section are severable. If any provision of this section or its application is held invalid, that invalidity shall not affect other provisions or applications that can be given effect without the invalid provision or application.”

As set forth above, California Labor Code section 432.6 prohibits employers from requiring any employee or applicant to “waive any right, forum or procedure for a violation of any provision” of FEHA or the entire Labor Code, including “the right to file and pursue a civil action” in “any court,” “as a condition of employment, or the receipt of any employment-related benefit.” In other words, section 432.6 essentially prohibits an arbitration clause in an employment contract.

One might think that an opt-out provision saves the arbitration clause because then the alternative dispute forum is not a condition of employment (i.e., the employee can get out of it).  However, section 432.6(d) declares agreements that allow employees to “opt out of a waiver or take any affirmative action in order to preserve their rights” impose a condition of employment. (See Lab. Code §432.6(c).) So, voluntary opt-out procedures are treated as if they were involuntary and, therefore, violate section 432.6.

Under the Labor Code, businesses that violate these restrictions are guilty of a misdemeanor (Lab. Code § 433), punishable by imprisonment not exceeding six months or a fine not exceeding $1,000, or both (Lab. Code §23). Individuals who prevail in an action enforcing their rights under section 432.6(d) will be entitled to injunctive relief and attorneys’ fees. (Lab. Code §432.6(d).)

The foregoing would normally be end of story:  no arbitration clauses after January 1, 2020, so, California employers contracting with California workers, should remove same from your employment contracts going forward from January 1, 2020.  For those contracts signed before January 1, 2020, one could probably keep the status quo, as the statute states that it “applies to contracts for employment entered into, modified, or extended on or after January 1, 2020.”  But if the contract is modified or extended after January 1, 2020, you should remove any arbitration clause. 

However, this answer becomes a bit more complicated because of a case decided February 2020, in which an Eastern Federal District Court in California enjoined the enforcement of section 432.6 “where the alleged waiver of any right, forum, or procedure is the entry into an arbitration agreement covered by the Federal Arbitration Act.” (Emphasis added.) (Chamber of Commerce of United States v. Becerra, et al. (E Dist. Cal. 2020) 438 F.Supp.3d 1078, 1108.)  In Chamber the court found:  “AB 51 [i.e., Labor Code section 432.6] is preempted by the FAA because it singles out arbitration by placing uncommon barriers on employers who require contractual waivers of dispute resolution options that bear the defining features of arbitration.”  (Id. at p. 1099.)

There are few relevant issues to consider with the Chamber case as it may or may not apply to California employers and California workers.

First, the court’s ruling was a preliminary injunction, meaning it was a temporary ruling put in place until the main lawsuit is finally resolved.  Nevertheless, the injunction (that is, no enforceability of section 432.6) is currently in place where the case is applicable to employers.

Second, the Chamber Court specifically limited its ruling to only apply to agreements “covered by the Federal Arbitration Act.”  But what does that mean?  The United States Arbitration Act (Pub.L. 68–401, 43 Stat. 883, enacted February 12, 1925, codified at 9 U.S.C. ch. 1), more commonly referred to as the Federal Arbitration Act or FAA, is an act of Congress that provides for judicial facilitation of private dispute resolution through arbitration. It applies in both state courts and federal courts, as was held in Southland Corp. v. Keating (1984) 465 U.S. 1. It applies to all types of contracts, except contracts of seamen, railroad employees, or any other class of workers involved in foreign or interstate commerce (meaning transportation workers), and it is predicated on an exercise of the Commerce Clause powers granted to Congress in the U.S. Constitution.  (See Circuit City Stores v. Adams (2001) 532 U.S. 105, 114.)

“The FAA was enacted in 1925 in response to widespread judicial hostility to arbitration agreements.”  (AT & T Mobility LLC v. Concepcion (2011) 563 U.S. 333, 339.)  The primary substantive provision of the FAA is found in 9 US Code section 2 which provides: 

“A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  (Emphasis added.)

The Supreme Court has “described this provision as reflecting both a liberal federal policy favoring arbitration and the fundamental principle that arbitration is a matter of contract.”  (Id. at p. 339.)  Arbitration agreements, therefore, are on an “equal footing with other contracts” and “courts are to enforce them according to their terms.”  (Id.)

But, still, when does the FAA apply?  As set forth above, the FAA applies to any contract “evidencing a transaction involved in commerce.”  What is commerce under the FAA?  9 US Code section 1 defines commerce as follows:

“ ‘[C]ommerce’, as herein defined, means commerce among the several States or with foreign nations, or in any Territory of the United States or in the District of Columbia, or between any such Territory and another, or between any such Territory and any State or foreign nation, or between the District of Columbia and any State or Territory or foreign nation, but nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”  (Emphasis added.)

By its terms, the FAA "provides for the enforcement of arbitration provisions in any contract evidencing a transaction involving interstate commerce." (Emphasis added.) (Mount Diablo Medical Center v. Health Net of Cal., Inc. (2002) 101 Cal.App.4th 711, 717.)  Contracts evidencing a transaction involving commerce among the several States is a contract involving interstate commerce not intrastate commerce—i.e., not citizens within the same state.  However, the words “Commerce among the several States” are broadly defined:  functionally equivalent to “affecting commerce” and signal “an intent to exercise Congress' commerce power to the full.” (Allied-Bruce Terminix Cos., Inc. v. Dobson (1995) 513 US 265, 277.)

The scope (or reach) of whether an employment contract invokes interstate commerce is subject to argument as the terms are broad, and, as mentioned, the FAA is liberally applied in favor of arbitration.  For example, an employment agreement between a stock brokerage and one of its account executives involves interstate commerce and is subject to the FAA. (See Perry v. Thomas (1987) 482 US 483, 490—contract between nationwide securities firm and California resident was covered by the FAA); and Thorup v. Dean Witter Reynolds, Inc. (1986) 180 Cal.App.3d 228, 233—FAA applied to an employment contract between nationwide stock brokerage and securities firm and California resident.)  On the other hand, an insurance sales agent's employment agreement did not involve interstate commerce and was thus not subject to the FAA where there was no evidence that her employment relationship had a specific effect or “bear[ing] on interstate commerce in a substantial way,” she was not an employee of a national stock brokerage or the employee of a member of a national stock exchange, and she did not work in other states or engage in multi-million-dollar loan activities that affected interstate commerce. (Hoover v. American Income Life Ins. Co. (2012) 206 Cal.App.4th 1193, 1207-1208.)   In another recent case, the Second District Court of Appeal in California found the FAA applied because the employer, a gym, operated health clubs in many states and Plaintiff’s “employment related to this interstate commerce.”  (Torrecillas v. Fitness International, LLC (July 21, 2020) DJ275695.)

In other words, while the FAA only applies when contracts involve interstate commerce, courts seem fairly liberal in finding interstate commerce.  However, still an employer would need to submit evidence to support its position that the FAA applies. (Carbajal v. CWPSC, Inc. (2016) 245 Cal.App.4th 227, 234—party asserting FAA governs has burden to show it applies “by presenting evidence establishing the contract with the arbitration provision has a substantial relationship to interstate commerce.”) 

While the Chamber case involved Plaintiffs that were membership organizations, and not  directly impacted parties, the Court found standing because “its members rely on arbitration agreements as a condition of employment or require their employees to affirmatively opt out of arbitration is they wish to do so.”  (Chamber, supra, at p. 1085.)  And, while there was no direct indication that the employment contracts all involved interstate commerce, “Plaintiffs agree that an injunction should apply only with respect to arbitration agreements governed by the FAA.” (Emphasis added.) (Id. at p. 1106.) 

In other words, it seems that the Chamber case should only apply to California employers who are involved commerce among the states and not to California employers who employ California workers to do work only in California.  If that is the correct reading of Chamber, then California employers who only do business in California should take heed and remove (and not include) arbitration provisions in their employment contracts, commencing January 1, 2020 and forward.

But, finally, a California employer should be aware that the Chamber case enjoined enforcement of the entirety of the operative Labor Code section 432.6 because that code section is preempted by the FAA:  “it discriminates against arbitration and interferes with the FAA’s objectives.”  (Chamber, supra, at p. 1100.)  Interestingly, neither the Court nor Defendants attempted to clarify that the Labor Code section 432.6 should still apply to California employment contracts not involved in interstate commerce.  Possibly, one might argue they did not have to make that argument because of what was mentioned in the case concerning the applicability of the FAA (the “injunction should apply only with respect to arbitration agreements governed by the FAA.”). 

One could argue, however, that the entire law prohibiting arbitration and opt outs (Labor Code section 432.6) was preempted by the FAA and so section 432.6 is currently unenforceable as to all California employers—whether interstate commerce is involved or not—because of the Chamber Court’s broad language in granting the injunction.  Moreover, interstate commerce, as referenced herein, is broadly defined.  In other words, one may want to consider taking the position that California employers (who only do business in California) may still include arbitration clauses in their employment contracts, at least until the Chamber case has concluded on appeal.  

However, because the Chamber Court granted the injunction specifically as to “an arbitration agreement covered by the Federal Arbitration Act,” the safer approach for California businesses who only do business in California is not to include an arbitration clause in their employment contracts.    

CONCLUSION:  If a California employer’s business and its employment agreements possibly relate to interstate commerce (i.e., work beyond California), then an arbitration clause should be considered (note:  what should be included in an enforceable arbitration clause raises other issues for another article).

If the California employer’s business and employment agreements do not relate to interstate commerce (i.e., work beyond California), then the employer should either not include an arbitration agreement or do a risk assessment:  Does the employer want to include arbitration  and risk fines, penalties and fees, or simply remove the provision until the law is more settled?  As mentioned, the less risky approach is to not include any arbitration clause for those specific California employers only doing business in California.  Of course, any employer should consult with a lawyer before making the final decision about contractual arbitration. 

Disclaimer

This entry does not give specific legal advice about your specific legal problem. No text or graphic contained in this entry is to be or should be used or relied upon as legal advice. This entry does not create an attorney-client relationship. If you want specific legal advice about your particular legal issues, or if you want to create an attorney-client relationship, you need to retain the Law Offices of Ron A. Stormoen by a signed written retainer agreement.