Update – Arbitration Agreements in California Employment

Posted on May 15, 2025

Navigating the complexities of arbitration agreements in California employment law can be daunting. The laws surrounding these agreements have evolved significantly, especially with new regulations impacting their enforcement, rights, and requirements. Understanding the rules governing arbitration agreements is essential for both employers and employees to remain compliant while leveraging their benefits.

This blog provides an in-depth examination of arbitration agreements in California employment. You’ll learn about their enforceability, required standards, employee protections, and the latest legislative developments. Employers can also discover actionable steps to ensure compliance.

What Is an Arbitration Agreement?

An arbitration agreement is a legal contract between an employer and an employee that requires disputes arising from employment to be resolved through arbitration rather than in court. Arbitration is an alternative dispute resolution (ADR) process where a neutral third party (the arbitrator) hears the case and issues a binding decision.

Compared to lengthy, public court proceedings, these agreements are often favored for their efficiency and confidentiality. However, they are scrutinized in states like California due to concerns about fairness and employee protections.

Enforceability of Arbitration Agreements in California

California favors arbitration agreements, but only under strict conditions that ensure these contracts are both procedurally and substantively fair.

Historically, AB 51 sought to prohibit mandatory arbitration agreements as a condition of employment. However, this law is no longer enforceable due to a permanent federal injunction, as it was deemed preempted by the Federal Arbitration Act (FAA). This landmark decision, outlined in Chamber of Commerce of the United States et al. v. Bonta, has reaffirmed employers’ ability to require arbitration agreements for matters covered by the FAA.

The landscape becomes more complex when the FAA does not apply. Workers in specific industries, such as transportation, may fall under exemptions, further complicating the enforceability of these agreements.

Key Requirements for Enforceable Agreements

To comply with California’s rigorous standards, employers need to ensure their arbitration agreements meet the following requirements:

Procedural Fairness: Agreements must be clear and presented in a way that allows the employee to understand and voluntarily consent. Practices like coercion or lack of transparency during the signing process are prohibited.
Substantive Fairness: Arbitration terms must not overly favor the employer. For example, both parties should be equally bound to arbitrate disputes, and essential rights (e.g., the right to damages or fair processes) cannot be waived.
Mutuality: The terms must require both the employer and employee to comply with the arbitration agreement, ensuring it’s not one-sided.
Consideration: Both parties must receive something of value in exchange for the agreement. Continued employment or a job offer typically satisfies this condition.
Clear Language: Agreements must explicitly state that employees waive their right to a jury trial and participate in class action lawsuits.
Electronic Signatures: If electronic signatures are used, they must be verifiable and linked directly to the signer.

Adhering to these standards can help employers increase the likelihood of their arbitration agreements being upheld in a dispute.

Employee Rights and Protections

California law places a strong emphasis on protecting employees from unfair arbitration practices. Employees cannot be forced into unconscionable agreements that eliminate critical legal protections. Additionally, the arbitration process must provide the following safeguards:

Neutral Arbitrator: Employees have the right to a fair and unbiased arbitrator.
Costs: Employers must cover arbitration fees to ensure the process doesn’t impose financial hardships on employees.
Discovery Rights: Employees must be allowed to gather evidence and build their case in arbitration.
Written Decision: Arbitrators are required to provide written findings to ensure transparency.

These safeguards ensure that arbitration doesn’t strip employees of their fundamental rights, even when it limits access to traditional courts.

Benefits and Drawbacks for Employers and Employees

Benefits to Employers

Efficiency: Arbitration reduces the time and costs of lengthy court trials.
Confidentiality: Unlike court cases, arbitration proceedings are private, minimizing reputational risks.
Finality: Arbitrator decisions are typically binding, reducing the likelihood of appeals.

Benefits to Employees

Simplified Process: Arbitration is less formal than traditional court proceedings, often making it more accessible.
Speed: Disputes are resolved faster, providing employees with faster outcomes.

Drawbacks

Potential Bias: Critics argue that arbitration may favor employers, especially in mandatory arbitration settings.
Limited Appeal Options: Arbitration decisions are binding, leaving little room for recourse if individuals feel the outcome is unjust.
Cost Risks for Employers: Employers bear the arbitration fees regardless of case outcomes, which can be a considerable expense.

Recent Legal Developments and Cases

Federal Arbitration Act Preemption of AB 51

The FAA’s blanket preemption of AB 51 establishes legal clarity around mandatory arbitration agreements, ensuring compliance with federal law. The legal precedent reaffirms employers’ rights to require arbitration agreements without fear of state interference, as ruled in Chamber of Commerce of the USA et al. v. Bonta.

SB 365 and SB 940

Two new California bills, SB 365 and SB 940, are reshaping the legal framework for arbitration agreements.

While SB 365 focuses on how arbitration appeals are handled, SB 940 examines wage-related disputes. Both laws highlight the evolving relationship between state law and the FAA and reflect California’s ongoing efforts to regulate arbitration agreements.

SB 365, signed into law in September 2020, addresses the issue of arbitration appeals in California. Previously, when an arbitration agreement contained a clause prohibiting appeal or review of the arbitrator’s decision, employees could not challenge any unfairness or errors in the process. This resulted in many workers being forced into binding arbitration agreements without any recourse to protect their rights.

With SB 365, California now requires that all arbitration agreements include a provision allowing for at least some appeal or review process. This empowers employees to challenge arbitrators’ decisions and seek justice for any wrongdoing.

On the other hand, SB 940 focuses on wage-related disputes and prohibits mandatory pre-dispute arbitration agreements for these types of cases. This means that employees have the right to take their wage disputes to court instead of being forced into arbitration.

Additionally, SB 940 requires employers to cover all fees associated with arbitration, such as filing and arbitrator fees. This removes any financial barriers for employees seeking justice in wage-related disputes.

These new laws demonstrate California’s commitment to protecting worker rights and ensuring fairness in the workplace. They also serve as a model for other states looking to implement similar worker protections.

However, it is essential to note that these laws still have limitations, and they do not eliminate mandatory arbitration agreements. Employees need to understand their rights and options when faced with these issues.

Steps for Employers to Ensure Compliance

Employers wanting to implement effective arbitration agreements should follow these steps to avoid disputes and legal challenges:

Consult Legal Counsel: Partner with experienced employment attorneys to draft and review agreements, ensuring they comply with state and federal laws.
Use Clear, Accessible Language: Avoid legal jargon and explicitly state terms and conditions.
Train HR Personnel: Equip your HR team with arbitration regulations and best practices for presenting agreements.
Offer Opt-Out Clauses: Including an opt-out option demonstrates fairness and voluntariness.
Follow Disclosure Requirements: Provide employees sufficient time to review the agreement and consult a legal advisor if needed.

By proactively addressing these considerations, employers can strengthen their agreements and foster employee trust.

Effectively Navigating Arbitration Agreements in California

Arbitration agreements in California continue to evolve, navigating the tension between federal preemption and state regulations. For employers, these agreements offer a critical tool for resolving disputes efficiently, while employees benefit from additional protections designed to prevent abuse.

Staying informed about legal updates, such as the FAA’s preemption of AB 51 and the implications of SB 365 and SB 940, is crucial for compliance and good governance. Employers should seek legal counsel to craft transparent, enforceable agreements that align with California’s stringent labor standards while leveraging the benefits of arbitration.

Focusing on fairness, clarity, and mutual benefit can help businesses build trust and ensure smoother dispute resolution processes within the evolving California employment landscape.

Expert Human Resources Consulting to Navigate Arbitration Agreements

At EQHR Solutions, we specialize in guiding California employers through the complexities of employment law compliance, including the development and implementation of arbitration agreements. With constantly shifting legislation like AB 51, SB 365, and SB 940, it’s critical to stay ahead of legal requirements to protect your organization and foster a fair workplace.

Our team of seasoned HR and legal professionals helps businesses create enforceable, balanced arbitration agreements that align with both state and federal law. Whether you’re updating existing policies or building new agreements from the ground up, EQHR Solutions offers the expertise, strategic insight, and hands-on support you need to stay compliant and reduce legal risk. Let us help you navigate these challenges with confidence and clarity.