Business Groups Fight California Ban on Mandatory Arbitration Agreements for Workers

SACRAMENTO, Calif. (CN) – Fighting a pro-worker law that bars mandatory arbitration agreements, the U.S. Chamber of Commerce and a host of business groups have sued to stop a California law set to take effect Jan. 1.

The influential coalition says the law, Assembly Bill 51, wrongly seeks to remove a common tool that businesses use to swiftly end and keep employment disputes out of the courts. According to the chamber and National Retail Federation, AB 51 is anti-business and pre-empted by federal law.

“The California Legislature has thus done exactly what binding precedent forbids: it has attempted to ‘undermine the Federal Arbitration Act’ – indeed, to wholly defeat it,” the groups say in their complaint, filed Dec. 6 in the Eastern District of California.

Signed in October by Governor Gavin Newsom, AB 51 prohibits employers from requiring applicants to waive their right to sue under state labor laws as a condition of employment.  It also allows workers to pursue damages and attorneys’ fees and in extreme cases opens employers up to potential criminal liability. It does not, however, prevent employers from entering into arbitration agreements with new hires.

Sponsored by the California Labor Federation and Consumer Attorneys of California, the measure cleared the Democratic-controlled Legislature in a series of mostly party-line votes.

Assemblywoman Lorena Gonzalez, D-San Diego, said her bill was meant to protect workers in industries where forced arbitration agreements are becoming more common including food service, hospitality and retail. She claims the popular agreements allow employers to keep sexual harassment and other ugly disputes out of the courts and by extension the public view.

In its lawsuit, the coalition argues that the limits on arbitration agreements are not only pre-empted by federal law and longstanding precedent, they will “generate more litigation, impose significant delays in California’s justice system, and increase costs for businesses and workers alike.”

The lawsuit names California Attorney General Xavier Becerra, State Labor Commissioner Lilia Garcia Brower, Secretary of the California Labor and Workforce Development Agency Julie Su, and Director of the California Department of Fair Employment and Housing Kevin Kish. The coalition is represented by firms Mayer Brown of Washington and Littler Mendelson of Sacramento.

Becerra’s office declined to comment on the lawsuit after being given a copy by Courthouse News, but Assemblywoman Gonzalez said she wasn’t surprised that “big business” is challenging her bill.

“When both parties choose arbitration freely, it can be a highly effective tool. But it doesn’t work when corporations say you won’t be hired unless you sign away your rights,” Gonzalez said in an email. “The state of California has a duty to protect workers on the job, and Assembly Bill 51 says employers can’t tell workers they will only get a job by signing away their rights.”

Arbitration contracts are commonly used by companies to handle disputes with both employees and customers and can often include bans on class-action complaints. Proponents view them as a useful alternative dispute resolution tool and a means of avoiding costly and lengthy litigation.

Critics claim the increased use of arbitration agreements has perpetuated workplace abuses and allowed companies to keep embarrassing disputes out of the public limelight.

At issue are mandatory arbitration agreements, which have exploded in popularity after a series of arbitration-friendly U.S. Supreme Court decisions in the early 2000s. According to the Economic Policy Institute, 53% of nonunion private-sector employers have mandatory arbitration procedures.

Lawmakers passed similar bills in 2015 and 2018 but former Governor Jerry Brown said they “plainly” violated federal laws and vetoed them. The third time was the charm as Gonzalez and the state’s powerful labor unions were able to sway Newsom to sign AB 51 this year.

The bill’s supporters argue that AB 51 complies with federal law because it only regulates employer behavior before an agreement is reached. They note that it does not invalidate existing agreements and still allows employers and workers to make arbitration agreements.

The legislative analysis published before the final vote on AB 51 in September echoes the supporters’ sentiment: “All the bill does is say that an employee cannot be forced to sign an arbitration agreement, and if the employee elects not to, the employee cannot be retaliated against.”

Last month, in a related class action matter, a federal judge tossed part of an arbitration agreement that required nursing home employees suing for unpaid wages to give up their right to seek civil penalties under the Private Attorneys General Act, a law that deputizes private citizens to enforce California’s strict labor codes.

With the new law set to go into effect in less than a month, the chamber wants Obama-nominated judge Kimberly Mueller to enjoin the state from enforcing it. Joining the chamber and retail federation as plaintiffs are California Retailers Association, National Association of Security Companies, Home Care Association of America and California Association for Health Services at Home.

“AB 51 singles out arbitration for disfavored treatment by imposing special restrictions on the formation of arbitration agreements, which do not apply to other types of contracts, and limit the ability of employers and workers to enter arbitration agreements,” the complaint states. “These requirements are not generally imposed to enter other provisions in employment contracts. Indeed, employers routinely condition employment on acceptance of other contractual terms.”

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