One Step Forward For Arbitration Agreements, Two Steps Back For Non-Disparagement Provisions
Mandatory Arbitration Agreements for Employees Are “On” Again...for Now.
Once upon a time, before a certain virus captured all of our attention, the California legislature enacted Assembly Bill 51 (AB 51), which prohibits employers from requiring employees to consent to mandatory arbitration agreements as a condition of employment. Many employers scrambled to revise their offer letters and arbitration agreements, explicitly stating that the arbitration agreements were voluntary and clarifying that employment offers were no longer contingent on execution of arbitration agreements. Just before the law was to go into effect on January 1, 2020, it was temporarily blocked by a California federal district court after several business groups proceeded with legal challenges on the basis that the California law was preempted by the Federal Arbitration Act (“FAA”).
In the two years since then, California employers have been in arbitration agreement limbo. Some employers continued to require mandatory arbitration agreements with the hope that AB 51 would be struck down by the courts. Other employers proceeded more cautiously, making their employee arbitration agreements voluntary.
On February 15, 2023, the 9th U.S. Circuit Court of Appeals concluded AB 51 is preempted by the FAA, opining that “state rules that burden the formation of arbitration agreements stand as an obstacle to the FAA and that no current precedent “suggests that a state rule targeting only the formation of arbitration agreement falls outside of the FAA’s preemptive scope.”
As a result of this ruling, California employers may currently require that new hires sign arbitration agreements as a condition of employment as long as the agreement is procedurally and substantively conscionable according to controlling case law.
While this gives employers a momentary reprieve, this is not necessarily the last time that the State of California and employers will battle over the enforceability of arbitration agreements. The California legislature may try to draft different legislation, or the State may request a rehearing or appeal to the U.S. Supreme Court.
If California does not further appeal the new 9th Circuit decision, the district court will have the authority to make a final determination as to the legality of AB 51. However, if a petition to the Supreme Court or a rehearing is granted, the original district court order enjoining enactment of AB 51 will remain in effect while the case continues to wind its way through the labyrinth of California’s court system.
We encourage employers to check in with the legal counsel regularly to make sure their arbitration agreements are compliant with any new legislation or court decisions. If you have questions about the enforceability of your current agreement, we are happy to help!
Employers Can’t Stifle All Disparaging Words With Severance Agreements.
As we all know, it is common for employers to offer severance to terminated employees in exchange for a release of claims. In addition to the release, many employers require that the departing employee agree they will not disparage the company in consideration for the severance pay.
This week, the National Labor Relations Board (“NLRB”) ruled that companies that make former workers promise not to disparage their former employers in exchange for a severance payment are breaking the law. The NLRB said it was restoring an "important principle and longstanding precedent" that employees cannot be coerced into waiving their rights.
The NLRB went on to explain that a severance agreement is unlawful “if its terms have a reasonable tendency to interfere with, restrain, or coerce employees in the exercise of their Section 7 rights." This includes the right under federal law to engage in collective action, such as union organizing, to improve workplace conditions. Thus, a non-disparagement clause that could be construed as preventing former workers from being able to assist investigations into ongoing labor law violations is illegal and unenforceable according to the NLRB.
As a reminder, the scope of non-disparagement provisions in severance agreements is already limited in California. The passage of the 2021 Silenced No More bill (Government Code section 12964.5) explicitly provides that “[a] nondisparagement or other contractual provision that restricts an employee’s ability to disclose information related to conditions in the workplace shall include, in substantial form, the following language: ‘Nothing in this agreement prevents you from discussing or disclosing information about unlawful acts in the workplace, such as harassment or discrimination or any other conduct that you have reason to believe is unlawful.’”
With this latest NRLB ruling, non-disparagement provisions will now also need to contain carveouts for activity protected under the National Labor Relations Act. Please consult with your employment counsel to see if your severance agreements may need to be revised following this ruling.