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California Criminalizes Arbitration Agreements

Gavel in the Sunlight

On October 10, 2019, California Governor Gavin Newsom signed a law that prohibits employers from requiring any applicant or employee “waive any right, forum or procedure for a violation of any provision of the California Fair Employment and Housing Act.” Violation of the new law is a misdemeanor. The law applies to any arbitration agreements that are entered into after January 1, 2020. The law does not apply to post-dispute settlement agreements, to negotiated severance agreements or to employees registered with self-regulatory organizations under the Securities Exchange Act.

If you are a regular reader of this blog, you may be asking yourself, “Can California really do this?” and “Wouldn’t this law be preempted by the Federal Arbitration Act?” With the caveat that courts will (no doubt) soon be ironing out these issues, my response is both, “Yes, California can really do this,” and, “Yes, we would bet money that a federal court will ultimately find that this law is preempted.” I suspect that many employers are going to be reluctant about becoming a test case, especially when criminal sanctions are involved.

One temporary solution — at least until the courts iron this out — would be to carve out claims under the California Fair Employment and Housing Act from any dispute resolution plan. Most California human resources managers and labor lawyers, however, would consider that to be a pretty huge carve-out. Given that the statute of limitations for such claims was recently increased from one to three years, it should not be surprising that California lawyers are much more likely to pursue discrimination, harassment and retaliation claims under state law as opposed to federal law.

If you happen to be an employer who has been thinking about implementing a dispute resolution program that would require employees to arbitrate all claims that they might have in the future, but you simply have not gotten around to it, then you may want to get back on it pronto and implement your program before the ball drops in Times Square. You can then take a wait-and-see approach with respect to any employees hired after the start of the new year.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.