As we previously reported, California Assembly Bill 51 (AB 51), signed into law by Governor Gavin Newsom, would prohibit employers from requiring employees to arbitrate claims arising under California’s Fair Employment and Housing Act (FEHA) and the California Labor Code. On February 7, 2020, a federal district court judge issued a preliminary injunction barring California from enforcing AB 51. The court concluded that the business groups that are the plaintiffs in the lawsuit are likely to prevail in their argument that AB 51 interferes with, and is preempted by, the Federal Arbitration Act. Assuming the preliminary injunction withstands appeal, it will likely remain in place at least until the district court decides whether to issue a permanent injunction.
Although California employers may still lawfully require employees to arbitrate any claims arising out of their employment—including claims arising under FEHA or the Labor Code—there are a variety of considerations employers should look at when deciding whether to require agreements to arbitrate as a condition of employment.
ADVANTAGES OF ARBITRATION FOR EMPLOYERS
Cost — Arbitration tends to be more streamlined than litigation in court, which may result in resolution of disputes at lower cost.
Efficiency — Court dockets tend to be clogged, which often results in long delays in resolution of disputes. Arbitration is often a quicker way to resolve disputes than litigation in court.
Experience — Arbitration generally permits the parties to select an arbitrator with extensive subject matter expertise. While civil judges hear all types of disputes, arbitrators can be picked for their specialized knowledge of the intricacies of California employment law.
Finality — With very limited exceptions, arbitration decisions are not appealable. As a result, once a decision is reached in arbitration, the parties can generally be confident that the matter is resolved, without the possibility of an appeal.
Confidentiality — Arbitration is more private than litigation in court. Hearings and trials are not held in open court, and filings are not available in any public record. Although some information relating to arbitrations can make its way into the public record in connection with motions to confirm arbitration awards in court or (in limited circumstances) appeals, arbitration may enable employers to avoid unwanted publicity.
Informality — Arbitration rules and procedures are generally less rigid and cumbersome than court rules and procedures. The flexibility of arbitration reduces the risk of procedural mistakes that could have dire consequences, and generally facilitates resolution of disputes in a way that is less disruptive to operation of the business.
“Runaway Jury” Avoidance — Because arbitrations are resolved by an arbitrator without a jury, there is less risk in arbitration of punitive damages awards fueled more by bias and emotion than by sober assessment of the facts and the law. Outside the arbitration context, jury trial waivers are unlawful in California. Arbitration is thus the only guarantee that an emotionally-charged dispute will be decided on the merits.
Class Action Waivers — Arbitration agreements generally contain a class action waiver, which requires the employee to resolve disputes on an individual basis and not to bring claims on behalf of a group of other employees. Litigating claims on a class-wide basis, even if they lack merit, can be significantly time consuming and expensive. The ability to obtain a class action waiver in connection with an arbitration agreement is often the factor that tips the scales for employers in favor of requiring employees to sign arbitration agreements as a condition of employment. As most employers in California are by now aware, however, representative actions under California’s Private Attorneys General Act, under which employees can seek significant penalties for Labor Code violations on behalf of themselves and other “aggrieved employees,” cannot be compelled to arbitration. A class action waiver thus does not altogether eliminate the risk of representative actions.
DISADVANTAGES OF ARBITRATION FOR EMPLOYERS
Cost — While cost has traditionally been viewed as an advantage of arbitration, cost can sometimes be a disadvantage instead, particularly in California. To be enforceable under California law, arbitration agreements in the employment context must meet certain minimum requirements, including the requirement that employees cannot incur additional costs in arbitration beyond what they would pay if they brought a claim in court. As a result, employers must generally pay the full cost of arbitration, which in most cases will exceed $50,000.
Difficulty of Obtaining Early Dismissals — In part because the arbitration process is already streamlined (or, more cynically, because arbitrators are paid by the hour or by the day), employers generally view arbitrators as less likely to grant early motions to dismiss or summary judgment motions. In court, such motions are often a relatively inexpensive way to dispense quickly with claims that lack merit.
“Split the Baby” Outcomes — While perhaps unfair, a perception exists that arbitrators are more likely than judges to reach compromise decisions, not ruling clearly in favor of one party or the other. Where the facts and law are in the employer’s favor, the employer may prefer to have the dispute resolved in court.
“Me Too” and Fairness Considerations — The “Me Too” movement has brought significant attention to employment arbitration and has increased the perception that employers use arbitration as a way to silence women and others who complain of harassment and discrimination in the workplace. The view that employers unfairly require individualized arbitration as a means to “get away” with unlawful employment practices that cannot effectively be challenged on an individual basis is also on the rise. In response to these concerns, many employers in California have carved out claims of sexual harassment and discrimination from their arbitration agreements, have given employees the option of “opting out” of arbitration, or have decided not to require employees to sign arbitration agreements in the first place.
Because California law with respect to arbitration issues remains fluid, and because societal views regarding arbitration are also in flux, we recommend consulting with employment counsel before modifying arbitration practices or agreements. Consultation with counsel is important also because it remains to be seen whether the injunction barring California from enforcing AB 51 will survive appeal and be made permanent.