Arbitration Archives - Adishian Law

This blog post is the latest in our running series covering the ongoing battle over Mandatory Arbitration Agreements in Employment.

To recap, On October 10, 2019, California Assembly Bill 51 (“AB 51”) was signed into law, adding Section 432.6 to the California Labor Code. It prohibits California employers from requiring applicants to sign mandatory arbitration agreements as a condition of employment or in exchange for any employment-related benefit. AB 51 also prohibits employers from retaliating against applicants or employees who refuse to sign mandatory arbitration agreements by terminating their employment or taking other retaliatory actions. Under the law, even and an opt out process is still considered a mandatory arbitration agreement. AB 51 does not apply to agreements that have already been signed before January 1, 2020, and only applies to those dated January 1, 2020, or after. Employers who violate the law as drafted could be subject to injunctive relief, lost wages, attorney’s fees, and a violation is considered a misdemeanor under California Labore Code section 433.

AB51’s Ban on Mandatory Arbitration Agreements was immediately challenged in court

In February 2020, Judge Mueller of the Eastern District of California issued a preliminary injunction (as a result of litigation brought by the Chamber of Commerce of the United States and other business groups. The injunction effectively prevented AB51’s ban on mandatory arbitration from taking effect. This is where our last article left off.

Between our last article and this article, California appealed……and there was the Covid-19 pandemic.

On September 15, 2021, a three judge Ninth Circuit panel held in a split decision that AB 51 is not fully preempted by the Federal Arbitration Act. In the panel’s decision in U.S. Chamber of Commerce et al. v. Rob Bonta et al., case number 20-15291, Judge Fletcher joined Judge Lucero’s majority opinion which concluded that the Federal Arbitration Act (“FAA”) doesn’t preclude arbitration agreements, but merely requires that arbitration agreements between workers and their employers be entered into voluntarily and consensually. Additionally, the panel ruled that the civil and criminal penalties associated with AB 51 “stand as an obstacle to the purpose of the FAA” and declared those aspects of AB 51 preempted by the FAA — in other words not enforceable.

What happened next?

On October 20, 2021, the Chamber of Commerce filed a petition for en banc review by the Ninth Circuit. As a result of this petition being granted, the Ninth Circuit panel’s September 15, 2021, decision to vacate the district court’s preliminary injunction is stayed, and therefore AB 51’s ban on mandatory arbitration agreements is still enjoined pending the outcome of future rulings.

On February 14, 2022, the same three judge Ninth Circuit panel announced that the rehearing en banc will be deferred until the U.S. Supreme Court decides relevant issues in Viking River Cruises Inc. v. Moriana. This decision was also split with Judges Lucero and Fletcher making the majority, and Judge Ikuta dissenting.

In Viking, the U.S. Supreme Court will decide whether claims brought under California’s Private Attorneys General Act, which allows workers to sue on behalf of the state of California for labor law violations, can survive federal arbitration requirements. Viking is scheduled for oral arguments on March 30, 2022.

With all this litigation activity at the federal and state level, for the moment, the court’s injunction prohibiting enforcement on AB 51’s ban on mandatory arbitration agreements remains in effect.

Employers with mandatory arbitration provisions in their handbooks should examine their options with the aid of experienced employment counsel.

For additional reading on arbitration agreements, visit Federal Judge Extends Restraining Order Preventing Ban on Employment Arbitration Agreements (AB51) – Adishian Law; California 2020: Employee v. Independent Contractors, Wage and Hour, Arbitration, Discrimination and more – Adishian Law; Arbitration Clauses in Employment Agreements, California Lawyers (adishianlaw.com) and Legal Update: California 2020 – Adishian Law

Up next in our blog: President Joe Biden signed the “Ending of Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 (EFASASHA).”

This case is focused on the battle regarding employment arbitration agreements in California.

Quoting from the Federal Docket:

“MINUTE ORDER issued by Courtroom Deputy C. Schultz for Chief District Judge Kimberly J. Mueller: On January 10, 2020, the court heard oral argument on plaintiffs’ motion to preliminarily enjoin enforcement of California Assembly Bill 51 (“AB 51”). ECF No. 5. At hearing, the court granted each party opportunity to file a supplemental brief addressing the issues of jurisdiction and severability. See ECF Nos. 37 , 40 . The court also ordered the temporary restraining order previously imposed, ECF No. 24 , remain in effect until January 31, 2020.

Now, having carefully considered all relevant briefing, including supplemental briefing, the court GRANTS plaintiffs’ motion for a preliminary injunction in full. (emphasis added). In the coming days the court will explain its reasoning in a detailed, written order; however, as of this minute order, the following preliminary injunction shall take effect:

1. Defendant Xavier Becerra, in his official capacity as the Attorney General of the State of California, Lilia Garcia Brower, in her official capacity as the Labor Commissioner of the State of California, Julia A. Su, in her official capacity as the Secretary of the California Labor and Workforce Development Agency, and Kevin Kish, in his official capacity as Director of the California Department of Fair Employment and Housing are:

a. Enjoined from enforcing sections 432.6(a), (b), and (c) of the California Labor Code where the alleged “waiver of any right, forum, or procedure” is the entry into an arbitration agreement covered by the Federal Arbitration Act, 9 U.S.C. §§ 1-16 (“FAA”); and

b. Enjoined from enforcing section 12953 of the California Government Code where the alleged violation of “Section 432.6 of the Labor Code” is entering into an arbitration agreement covered by the FAA.

2. There is no realistic likelihood of harm to defendants from preliminarily enjoining enforcement of AB 51, so no security bond is required. It is so ordered.

(Text Only Entry) (Schultz, C) (Entered: 01/31/2020) “

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At the time of this article, this was the current state of play in the ongoing battle over employment arbitration agreements in California.

So we will wait for the Court’s detailed reasoning regarding employment arbitration agreements. For now though, as of February 3, 2020, AB51 remains unenforceable.

For more information about this topic, please Contact Us.

Areas of Law: This newsletter touches on several intertwined areas of business and employment law that are impacted by California’s new laws: (1) Employee v. Independent Contractor plus Wage and Hour; (2) Arbitration; (3) Discrimination and (4) Other areas.

Why it Matters?: In our opinion, any business — whether it has 5, 50, 500 or 5,000 employees — should pay close attention to all of these changes as any one can be the trigger for significant financial liability. If your business needs help addressing these issues, please contact our firm.

1. Independent Contractor v. Employee (Dynamex and Borello)
AB5 codified the Dynamex ruling from the California Supreme Court, which applied the ABC test (see our August 2, 2018 update, “The ABCs of Independent Contractors“) to determine whether a worker is an independent contractor. In summary, to be an independent contractor the worker must (a) be “free from control and direction”; (b) “perform work outside the usual course of the hiring entity business” and (c) “customarily engaged in an independently established trade.” Under this ABC test, we believe it is very difficult for a business to establish that a worker is an independent contractor. There is some minor flexibility for businesses hiring licensed professionals or receiving professional services as these relationships are analyzed under another test (Borello).

Our business has always used a lot of Independent Contractors, what could go wrong?
Well, everything. Lawyers often use the phrase a “parade of horribles”, and that would be appropriate here. A single alleged independent contractor could (a) file a complaint for workers compensation, (b) file an unemployment insurance claim; (c) file a labor claim for overtime, or (d) hire an attorney to file a “wage and hour” claim (including pay stub compliance, meal break violations, rest break violations and failure to pay overtime). If a wage and hour claim is filed, the damages escalate quickly including statutory penalties and attorney’s fees…and there is no insurance.

Wage and hour claims are frequently filed as class actions.Likewise, there could be an EDD audit. In a “misclassification” based action, the Company’s only defense will be that the worker is an independent contractor, which was always hard to establish, and just became much more difficult. Bottom line, in most situations, the Company will lose the independent contractor battle in our opinion. If you are a business owner with a history of hiring a lot of independent contractors, we recommend that you consult with law firm to see what can be done to lessen your exposure. There may be lawful steps you can take before a lawsuit is filed. If you would like us to confidentially review your situation, please contact our firm.

2. Changes to Arbitration: Immediately challenged
AB51 banned mandatory arbitration agreements and prohibits employers from requiring applicants or existing employees to waive any right, forum or procedure for any employer violations of FEHA, the Labor Code or other statutes governing employment as a condition of employment, continued employment or the receipt of employment related benefits. The bill also prohibits an employer from threatening, retaliating or discriminating against, or terminating 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 specific statutes governing employment. SB707 also requires that in an employment or consumer arbitration where the drafting party is required to pay for arbitration and fails to do so within 30 days after the due day, the drafting party will waive arbitration and face drastic monetary and non-monetary sanctions.

AB51 has been challenged in federal court, and the court issued a 10 day temporary restraining order (TRO). Stay tuned.

3. Changes to Discrimination law: Lactation Rooms, Hair Styles, Training and Time.
There are a number of important changes. SB142 requires a lactation room or location that includes prescribed features with close proximity to a refrigerator and sink. SB188 adds “hairstyles: to the list of potential basis for race discrimination. AB9 extends the time to file a discrimination complaint with FEHA from 1 to 3 years. SB788 extends the time to comply with sexual harassment training for employers with 5 or more employees. For help here, contact our firm.

4. Other updates.
California also passed the following employment related laws, which we will just list in summary form here:

AB749 prohibits No Rehire clauses in settlement agreements
AB673 and SB 688 provide additional remedies for failure to pay wages
SB83 increases the maximum wages replacement under California paid family leave
AB35 strengthens law protecting employees from toxic materials
AB203 requires Valley Fever awareness training is expected to be working near substantial dust disturbance
AB1223 requires private employers with 15 or more employees to provide leave of absence with pay for organ donation
AB1554 requires new notice requirements for Flexible Spending Accounts (FSA)
AB1804-1805 address the law regarding occupational injuries
IRS New W4

If you have a concern that touches on one of these other areas, please contact our firm.

Key Takeaways: What Should a California Business Owner Do?
If you own a business in California with a substantial pool of employees, you might be feeling overwhelmed with all these changes, the associated risks and the potential financial exposure. What should you do? Our recommendations:

1. Get an attorney involved on your side. If you don’t have a general counsel or employment attorney, or your attorney is not experienced with these issues, contact our firm.

2. Review your independent contractor / wage and hour exposure. We have helped several clients address these issues. Work with an attorney immediately (i.e. don’t wait until the lawsuit is filed), and if you receive an EDD audit have your CPA work with your attorney.

3. Improve your payroll systems and processes. You may need to redesign your compensation plans, and processes to get into compliance and minimize future risks.

4. Revise your handbooks. If you don’t have a handbook, get one. We offer a flat rate for our California 2020 handbook, and a reduced rate for annual updates, with reduced rates for multi-company engagements. Contact us for information.

Have you been fired from your job? Do you believe that your termination was wrongful? Would you like to file a wrongful termination complaint against your former employer? Does your employment agreement contain an arbitration clause? What is arbitration? Does an arbitration clause preclude you from filing your claim in court?

What is Arbitration?

Arbitration is the most traditional form of private dispute resolution in which a neutral third party (ie. the arbitrator – who is usually a retired judge or attorney) renders a decision after a hearing at which both parties have an opportunity to be heard. Arbitration is designed to avoid the formalities, delays, expenses, and vexation of ordinary litigation (Black’s Law Dictionary, 6th Ed.).

Arbitration Clauses in Employee Agreements

Many individuals who have endured an injustice at the workplace seek remedy through the courts. However, many employment agreements contain an arbitration clause. Arbitration clauses, in general, stipulate that if there is any dispute or disagreement related to the employment (eg. claims of discrimination, wrongful termination, claims of harassment, etc.) both the employer and employee agree to submit the dispute to binding arbitration pursuant to the California Arbitration Act (California Code of Civil Procedure §1280, et. seq.). The decision reached at the end of an arbitration hearing is final and binding

But the simple inclusion of an arbitration clause does not necessarily preclude access to the courts. If a court finds that the employment agreement is an “unconscionable contract,” the court can refuse to enforce the arbitration clause (California Civil Code §1670.5(a)).

Validity of Arbitration Clauses

So what constitutes an unconscionable contract? In brief, a contract is unconscionable if it is an “adhesion contract,” which is to say that there is no equal bargaining power, no real negotiation, and an absence of meaningful choice (Ellis v. McKinnon Broad, Co. (1993); American Software, Inc. v. Ali (1996); Circuit City Stores v. Adams (2001)). Under California law, unconscionability consists of two components: (1) procedural; and (2) substantive.

Firstly, the procedural element focuses on two factors: oppression and surprise. Secondly, the substantive element focuses on “overly harsh” or “one-sided” terms within the contract (A&M Produce Co. v. FMC Corp (1982)). Arbitration clauses must meet certain requirements to be lawful, including “provid[ing] for more than minimal discovery,” and “not requir[ing]] employees to pay either unreasonable costs or any arbitrator’s fees or expenses as a condition of access to the arbitration forum” (Armendariz v. Found Health Psychcare Servs. (2000)).

What to do First?

Both procedural and substantive unconscionability must be present before a court will refuse to enforce a contract and its arbitration clause. If you believe that both are present in your case, or simply would like legal analysis, we recommend that you consult an attorney, who should b able to advise you of your choices.

[Many thanks to our friends at the Judicial Arbitration and Mediation Services (JAMS) for source materials on this topic.]

[Case References: Ellis v. McKinnon Broad, Co. (1993) 18 Cal.App.4^th 1796, 1803; American Software, Inc. v. Ali (1996) 46 Cal.App.4^th 1386, 1390; Circuit City Stores v. Adams (2001) 532 U.S. 105, 119; A&M Produce Co. v. FMC Corp (1982) 135 Cal.App.3d 473, 486-87; Armendariz v. Found Health Psychcare Servs. (2000) 24 Cal.4^th 83, 114]

[CA Statute References: California Code of Civil Procedure §1280; California Civil Code §1670.5(a)]

About Adishian Law Group, P.C.

Adishian Law Group is a California law firm with a statewide practice in the areas of Corporate law, Employment law, Real Estate law and Mediation Services. Adishianlaw.com is one of the oldest continually operating law firm websites on the Internet. The firm serves its clientele via three offices located in the major business hubs of El Segundo, Palo Alto and San Francisco. As of March 2013, Adishian Law Group, P.C. has represented individual and corporate clients located across 20 California counties, 4 States outside of California and 9 foreign countries — in over 340 legal matters.

For more information about this topic or to speak with Chris Adishian: