California is generally known as one of the more employee-friendly jurisdictions, and some commentators have opined that mandatory arbitration is at odds with California’s worker-protection public policy. In fact, two race discrimination lawsuits filed by former employees against Tesla, Inc., with largely similar facts of colleagues/supervisors using racial slurs against the plaintiffs and other Black workers demonstrate the potential disparity in jury verdicts v. arbitration awards.
- On October 4, 2021, a San Francisco federal jury awarded about $137 million ($130 million in punitive damages and $6.9 million for emotional distress) to a former worker who endured racially hostile work environment. See Owen Diaz v. Tesla, Inc., S. District Court for Northern California, Case No. 3:17-cv-06748-WHO. This jury trial was possible because the employee did not sign Tesla’s mandatory arbitration agreement. For more on the Diaz jury verdict, see, for example, Lora Kolodny, Tesla Must Pay $137 Million to Ex-Worker Over Hostile Work Environment, Racism, CNBC.com, Oct. 5, 2021 (updated), https://www.cnbc.com/2021/10/05/tesla-must-pay-137-million-to-ex-worker-over-hostile-work-environment-racism.html.
- In contrast, a few months earlier, on May 26, 2021, an arbitrator awarded Tesla former employee, Melvin Berry, a little over $1 million ($266,278.50 for damages and $755,579 in attorney’s fees and costs) for enduring a racist, hostile workplace at Tesla that included supervisors using racial slurs directed at him. See Melvin v. Berry v. Tesla, Inc., JAMS Ref. No. 1100099676, Amended Final Award, May 12, 2021, https://www.scribd.com/document/519136625/Melvin-Berry-s-Tesla-case. For more on the Berry arbitration award, see, for example, Khristopher J. Brooks, Former Tesla Employee Who Said Supervisors Called Him the N-Word Awarded $1 Million, CBSNews.com, Aug. 6, 2021 (updated), https://www.cbsnews.com/news/tesla-million-melvin-berry-fremont-california-n-word-racial-discrimination/.
With that background, California Governor Gavin Newsom signed into law California Assembly Bill (AB) 51 on October 10, 2019, that effectively barred employers from requiring workers to enter into binding arbitration agreements to resolve claims under the California Fair Employment and Housing Act (“FEHA”) and California Labor Code (e.g., wage-and-hour claims). AB 51 added Government Code Section 12953 and Labor Code Section 432.6, and was intended to apply to all contracts “entered into, modified, or extended on or after January 1, 2020.” Lab. C. Sect. 432.6(h); see also id. Sect. 432.6(g) (AB 51 does not apply to “postdispute settlement agreements or negotiated severance agreements”). As the law basically seeks to prohibit employers from requiring workers to agree to binding arbitration as a condition of employment, this article will refer to AB 51 as the “Ban on Arbitration” as shorthand. The authors of the Ban on Arbitration expressed the need for drastic measures to ensure that workers have the freedom to go to court, rather than being forced to private arbitration, concerning employment-related claims and disputes. See AB 51, https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB51.
The Ban on Arbitration legislation served as a broad and powerful backlash to the then-growing judicial trend of enforcing binding arbitration agreements against employees. Almost as soon as the ink dried on Governor Newsom’s signature on the law, prominent and well-funded business groups filed legal challenges. That litigation culminated in a February 2020 preliminary injunction in the US Chamber of Commerce v Bonta et al. lawsuit which struck down the law on federal preemption grounds. United States District Court Judge Kimberly J. Mueller specifically granted the business group’s motion for preliminary injunction, finding that the Ban on Arbitration law exceeded California’s legislative rights because it conflicted with the Federal Arbitration Act (“FAA”) and, consequently, was “preempted” by those federal laws upholding the validity of mandatory employment arbitration agreements. See Chamber of Commerce of United States v. Becerra (E.D. Cal. 2020) 438 F.Supp.3d 1078, 1095–1100.
On September 15, 2021, the Ninth Circuit issued its much-anticipated opinion in an appeal challenging Judge Mueller’s federal preemption injunction. In a divided opinion, the three-judge panel largely reversed Judge Mueller’s injunction resulting in the immediate reinstatement of California’s law prohibiting employers from requiring workers to arbitrate work-related claims. However, the Ninth Circuit also found that the provisions of Section 432.6 that impose criminal (under Labor Code Section 433) and civil (under Government Code Section 12953) sanctions on individuals or entities for the act of executing an arbitration agreement are invalid. The latter part of the ruling basically removes the assessment of express penalties for employer violations, but the gist of the Ban on Arbitration law is now controlling law. See Chamber of Commerce of United States v. Bonta (9th Cir. Sept. 15, 2021) ___F.4th ___, 2021 WL 4187860.
What does this all mean for California businesses and workers?
First, the Ninth Circuit decision only applies to mandatory arbitration agreements entered into after the enactment of Labor Code Section 432.6: January 1, 2020. AB 51 only applies to those arbitration agreements that were not voluntarily entered into or were made a condition of employment. For example, not providing the arbitration agreement in the employee’s native language or including the arbitration agreement along with other employment-related documents could be facts that militate against an arbitration agreement being voluntarily entered into. See, e.g., OTO, L.L.C. v. Kho (2019) 8 Cal.5th 111, 127–28 (procedural unconscionability analysis; pre-AB 51).
Second, AB 51 does not apply to enforceable mandatory arbitration agreements entered into before January 1, 2020.
Third, it remains unclear how courts will analyze whether or not an agreement is consensual. While not tested, one commentator has suggested that employers should consider providing separate consideration (read: financial compensation) in exchange for an employee’s agreement to arbitrate the employee’s FEHA and Labor Code claims as a workaround to AB 51. See, e.g., OTO, L.L.C. v. Kho, supra, 8 Cal.5th at 170–71 (Chin, J., dissenting) (critiquing majority’s “insistence that there be separate consideration for [worker’s] agreement to arbitrate claims covered by the Berman procedure,” among other criticisms of the majority’s unconscionability analysis). Unanswered questions remain including whether separate consideration, in itself, would be enough to prove the employee voluntarily agreed to arbitrate and, if so, how much consideration would be enough? In the analogous context of contractual interpretation, in general, the adequacy of consideration is not required as an element in establishing an enforceable contract. But given the strong public policy behind AB 51, we suspect that the courts would consider the amount of consideration as being one of many factors to analyze in determining whether the agreement was voluntary or coerced and, in such instances, would require more than token payment(s) or benefits. We will have to wait until these disputes proceed through litigation for guidance.
The Ban on Arbitration law highlights the need for employers to be very cautious about trying to make binding arbitration a term or condition of employment. Although the law is now, once again, in place, the future of the law is not clear. Further appeals, potentially to the United States Supreme Court, are anticipated. In addition, even in the absence of further appellate activity, the Ninth Circuit’s decision “remanded” the case for further District Court proceedings. This means that the lawsuit will now go back on the track of litigation which will be vigorously prosecuted and defended on both sides of the dispute and could take several years for final resolution.
For the time being, however, employers who are or may be considering using binding arbitration agreements as part of their standard onboarding and hiring documentation, must be very careful before choosing to enforce those agreements. As explained above, the law does not prohibit all binding arbitration agreements for all kinds of employment disputes. Rather, the law requires employers to prove that a binding arbitration agreement resulted from a level playing field of negotiations between the employer and the prospective employee and, ultimately, evidences a consensual agreement between the parties. This is a highly fact-intensive analysis that will vary from case to case. But the burden of proof remains on the employer seeking to enforce the binding arbitration clause which means that the agreement will otherwise be presumed invalid. Presumptions of invalidity are historically difficult for employers to overcome especially in the mostly employer-friendly courts of California.
Scherer Smith & Kenny LLP is available to address any questions you may have related to these and any other employment-related laws and updates. For additional information, please contact Denis Kenny (firstname.lastname@example.org), John Lough (email@example.com) or Ryan Stahl (firstname.lastname@example.org).
- Written by Denis Kenny and John B. Lough