Court Permanently Halts California Ban on Mandatory Arbitration

Sacramento, CAOn January 31, the District Court for the Eastern District of California permanently enjoined enforcement of AB 51, a provision of California labor law that would have banned mandatory arbitration clauses in employment agreements on and after January 1, 2020.

The ruling is a big blow to California workers seeking to participate in class action wage and hour lawsuits. It will likely weaken efforts to enforce AB 5, often called “the gig worker bill”, and it may set the stage for a constitutional battle before the U.S. Supreme Court.
 

California Assembly Bill 51

AB 51 sought to prohibit California employers from requiring employees to sign arbitration agreements relating to claims under the Fair Employment and Housing Act and Labor Code. FEHA is the California labor law under which complaints about worker misclassification, overtime, minimum wage, and a host of other issues are brought.

In agreeing to arbitration, employees and independent contractors typically give up their rights to bring a lawsuit in court or to join in a class action lawsuit. Workers tend to fare badly in arbitration. These are usually secret proceedings conducted under terms dictated by the employer. More often than not, workers simply give their right to pursue wage and hour claims through arbitration. The process, itself, precludes remedies that might otherwise have been available.
 
This is especially true for low-wage workers who may be unaware that they had waived their legal rights, may not understand the arbitration process and feel pressured to hold on to even their job, despite the consequences. This was the problem that AB 51 sought to fix.

AB 51 also played an important role, at least for future disputes, in making California Assembly Bill 5 enforceable. AB 5 codifies of the holding of Dynamex Operations West, Inc. v. Superior Court, which would require most employers to reclassify many of their independent contractors as employees, eligible for wage and hour protections under state law.

Should an employer lose a worker misclassification lawsuit under the provisions of Dynamex or AB 5, it may have a fallback strategy if it requires mandatory arbitration as a condition of employment. An employer can force individual arbitration to dispose of most wage and hour claims. Forcing individual arbitration is Plan B, should Plan A (classification as an independent contractor) fail. AB 51 foiled that maneuver. Without AB 51 employers can now go back to using Plan B, as necessary.

Employers whose business model depends on the use of low-cost gig workers, such as Uber, TaskRabbit and GrubHub have been in an uproar ever since the bills were passed. AB 5, in particular, has been described as an “existential threat” to Uber and Lyft.
 

Chamber of Commerce of U.S. v. Xavier v. Becerra

In December 2019, the U.S. Chamber of Commerce sued the state of California to enjoin enforcement of AB 51. The complaint argued that AB 51 violated the Federal Arbitration Act and cited two recent U.S. Supreme Court decisions for support: Epic Systems Corp. v. Lewis and Kindred Nursing Centers. Ltd. Partnership v. Clark.

California, on the other hand, argued that AB 51 does not target arbitration but rather focuses on the collective waiver of any “right, forum or procedure for a violation” of state law. According to the State, AB 51 was intended only to influence employer behavior and that it was not directed at limiting the formation of arbitration agreements.
 
It is a strange contrast in arguments. The Chamber focuses on the legalistic issue of federal preemption of state law; the State of California, although facially responding to the preemption issue, fundamentally focuses on worker protection through meaningful access to the courts.

The District Court issued a temporary restraining order blocking enforcement of AB 51 at the end of December. The issues were briefed again by both parties, and the court issued a permanent order blocking enforcement of AB 51 on January 31. AB 51 is effectively dead, unless subsequently revived on appeal.
 

What Now?

The employers won this round. The State of California may ultimately seek a writ of certiorari to the U.S. Supreme Court, as the presiding judge of the California District Court seemed to anticipate.

The Supreme Court may not accept the case, reasoning that it presents no issue not already resolved in Epic Systems or Kindred Nursing Centers. In Epic Systems, the majority’s opinion, written by Justice Neil Gorsuch, opined that it is not illegal under federal law for employers to force workers to waive their class action rights as a condition of employment. The case has already been accepted as binding precedent by the Ninth Circuit.

If the case is heard by the Supreme Court, attorneys for the State of California will have their work cut out for them to support their argument that AB 51 has application to “forums or procedures” beyond arbitration.

In the meantime, the focus of those who represent employees and independent contractors in wage and hour disputes may have to go back to re-crafting a state legislative remedy.