Mandatory Arbitration Agreements Outside the FAA Are Unenforceable in California

Seyfarth Synopsis: California Labor Code section 432.6 prohibits employers from, as a condition of employment, requiring employees to waive the right to file civil complaints. A California Court of Appeal has held that, under Section 432.6, a mandatory arbitration agreement is unenforceable unless it governed by the Federal Arbitration Act (FAA). The employer’s description of its onboarding process, under which the employee could sign the agreement or look for other work, was enough to show the agreement was mandatory. Because the agreement was not governed by the FAA, it was unenforceable. Molina v. Triumph Residential Services, Inc.

The Facts

Triumph Residential Services, Inc. (Triumph) manages residential buildings in Southern California. During hiring and onboarding, Tiffany Molina signed an arbitration agreement covering any dispute related to her employment. The agreement expressly waived class and representative claims. It also said that both parties had a chance to review and negotiate its terms, and signed “freely and voluntarily.”

Labor Code section 432.6, enacted by AB 51 in 2019, makes it unlawful, and a misdemeanor, to require an applicant or employee to waive any right, forum, or procedure as a condition of employment. An agreement that requires the employee to opt out, or to take “any affirmative action” to preserve any rights, counts as a condition of employment. The statute also bars retaliation against anyone who refuses to sign such an agreement. But, Section 432.6(f) states that nothing in the section “is intended to invalidate a written arbitration agreement that is otherwise enforceable under the Federal Arbitration Act.”

In November 2024, Molina filed a wage-and-hour class action. Triumph moved to compel individual arbitration and to dismiss the class claims. Triumph argued that California law governed the agreement, rather than the FAA. It also argued that the agreement was voluntary because Molina “was free to accept the Arbitration Agreement, attempt to negotiate out of it or look for other employment.”

Molina responded that the agreement violated Section 432.6. Triumph offered no evidence that employees could decline to sign. Because the agreement’s purpose was unlawful—requiring arbitration of Labor Code claims as a condition of employment—the trial court held the agreement was void. Triumph appealed.

The Court of Appeal’s Decision

The Court of Appeal affirmed the trial court’s order, holding that an arbitration agreement required as a condition of employment is unenforceable unless the FAA applies.

This is the first published decision from the California Court of Appeal on this issue. In Chamber of Commerce v. Bonta, the Ninth Circuit held that the FAA preempts AB 51. Since then, most employers have assumed the statute has no practical effect. Molina makes clear that assumption holds only when the FAA applies.

Triumph argued that Section 432.6’s FAA carve-out protects every arbitration agreement, whether or not the FAA applies. The Court of Appeal disagreed. California courts normally refuse to enforce a contract that violates an express provision of law. Section 432.6’s carve-out is a narrow exception to that rule and, by its plain terms, covers only agreements enforceable under the FAA. It is well-established that courts cannot create exceptions that the Legislature did not write. So, in the absence of actual FAA preemption, the Court of Appeal concluded that it was “not plausible” that the Legislature meant to let employers enforce illegally formed agreements.

The Court of Appeal also declined to follow several federal district courts that have held AB 51 never affects enforceability, even under California law. Those courts relied on the Bonta decision, but Bonta involved only agreements governed by the FAA, and the district courts never explained why the carve-out should reach agreements covered by the California Arbitration Act.

With regard to whether Molina’s agreement was a mandatory condition of employment, Triumph’s own evidence was dispositive. Telling Molina she could accept the agreement or look “for other employment” was “simply another way of stating” that arbitration was a condition of employment. The option to “negotiate out of” the agreement was similarly unavailing, as it required Molina to take affirmative action, which the statute treats as a condition of employment. In the final analysis, the agreement’s statement that it was signed “freely and voluntarily” could not save it.

What Molina Means for Employers

Arbitration agreements with class waivers are one of the most effective defenses to wage-and-hour class actions. Molina puts that defense at risk wherever the FAA does not apply. Employee-plaintiffs will likely cite Molina in opposing motions to compel arbitration whenever FAA coverage is open to question.

The agreements most at risk are those that identify the California Arbitration Act as the governing statute, as well as those agreements that are silent as to governing law. Under Tuufuli v. West Coast Dental Administrative Services, the FAA governs when the parties expressly adopt it, so employers would be wise to review their agreements to ensure that they make this election. However, Molina did not decide when an agreement is “otherwise enforceable” under the FAA, so an FAA election clause may not fully protect an agreement’s enforceability.