Arbitration agreements are very popular in employment contracts, but some states are attempting to limit the use of mandatory arbitration agreements between employers and employees. California is a prime example. From January 2020 to February 2023, a mandatory California employment arbitration agreement was banned in the state. Although that law has been blocked by a federal court for now, it highlights the need to ensure that your arbitration agreements comply with current state and federal law.
Here’s what to know about employment arbitration agreements in California—and how to create one with SixFifty.
Arbitration agreements in California employment
Arbitration agreements are common in employment contracts. When someone agrees to an arbitration clause, they agree to resolve cases through alternative dispute resolution, rather than a lawsuit. Arbitration involves a neutral third party arbitrator, who hears the case and decides the final legal outcome. The rules and procedures are more streamlined than in litigation, which makes it a less formal and often faster process.
Furthermore, arbitration agreements are private, as opposed to court proceedings, which are a matter of public record. Rulings usually cannot be appealed—but employees do still have the right to file certain claims with government agencies, such as the Equal Employment Opportunity Commission, if they feel they have experienced discrimination.
Currently, arbitration agreements are allowed in California employment contracts.
Are employment arbitration agreements enforceable in California?
California tried to ban mandatory arbitration clauses in employment contracts a few years ago. California Assembly Bill 51, which took effect on January 1, 2020, prohibited employers from requiring employees and/or job applicants to agree to arbitration as a condition of employment, continued employment, or receipt of any employment-related benefit. The law also imposes criminal and civil sanctions against employers who threatened, discharged, retaliated or discriminated against employees who refused to consent to arbitration.
On February 15, 2023, the Ninth Circuit Court of Appeals blocked AB 51, ruling that it was preempted by the Federal Arbitration Act. While the Court noted that AB 51 didn’t completely ban arbitration agreements, it disfavored and severely burdened their formation. At this time, however, it appears that the ruling only applies to arbitration agreements where the Federal Arbitration Act applies. Furthermore, the state may seek rehearing or Supreme Court review. This could change California law once again, so employers should keep an eye on these developments to stay on top of changes.
While this is good news for employers, the purpose of the law was to make up for the unequal bargaining power between employers and employees. Employment contracts are usually a “take it or leave it” proposition, especially when employers make arbitration a mandatory condition of employment. Employees are free to negotiate or turn down the offer, but they are often at a significant disadvantage. AB 51 attempted to level the playing field and keep litigation as an option.
Who pays for employment arbitration in California?
The question of who pays for employment arbitration in California was decided in Armendariz v. Foundation Health Psychcare Services, Inc., a case decided in 2000. The California Supreme Court established several conditions to enforce a California employment arbitration agreement. One of these conditions was that if an employer includes an arbitration agreement in their employment contract, they are responsible for paying arbitration fees.
The reasoning was that since employees wouldn’t have to pay for a judge to hear a lawsuit (aside from ordinary court filing fees), they shouldn’t have to pay for arbitration. Plus, requiring an employee to pay all or part of the expenses could restrict an employee’s financial ability to bring valid claims against an employer. While arbitration is often less expensive than litigation, the fees may be prohibitively expensive for the average employee. Therefore, employers who prefer or require arbitration must bear the costs.
How do you create a California employment arbitration agreement?
Creating a California employment arbitration agreement requires careful legal research—especially now that the law has recently changed, and may change again if AB 51 is further reviewed or reheard. This can be costly and time-consuming, especially for small businesses who don’t have their own in-house legal team. On the other hand, copying and pasting one-size-fits-all arbitration clauses does not guarantee that your arbitration agreement will comply with the laws within the jurisdiction in which employees work.
SixFifty offers an ideal middle ground. Instead of hiring a lawyer to draft an agreement or relying on a generic template, you can generate your own customized California employment arbitration agreements with our user-friendly Employment Agreements tools. Just answer a few questions about your company and download the generated agreement.
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