CA Court Bars Employers from Sidestepping New Arbitration Limits
Arbitration has become a common feature of employment contracts in recent decades. Employers often require new hires to sign agreements waiving their right to sue in court, instead mandating that any disputes be resolved through private arbitration. Today, well over half of U.S. nonunion employees are subject to mandatory arbitration agreements – a dramatic increase from a few decades ago. Proponents argue that arbitration is a faster, cheaper way to handle disputes. However, it’s been a contentious issue because it occurs behind closed doors and can limit employees’ ability to fully assert their rights. In sensitive cases like sexual harassment, critics say forced arbitration enables companies to keep misconduct allegations quiet, depriving victims of their day in court. Recent legal changes – most notably the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (EFAA) of 2022 – have started to tilt the balance by giving employees more choice. And a brand-new court ruling has reinforced these changes, closing a loophole that some employers tried to exploit.
Background
The FAA and the rise of mandatory arbitration: The Federal Arbitration Act (FAA) is a nearly 100-year-old law that provides the legal framework favoring arbitration. Enacted in 1925, the FAA established a strong federal policy favoring arbitration. Over the years, the U.S. Supreme Court has vigorously enforced this policy. It has upheld arbitration clauses even for claims based on employment statutes, reasoning that unless Congress explicitly forbids arbitration for a particular type of claim, such disputes can be arbitrated under the FAA’s liberal policy in favor of honoring arbitration agreements. In practice, this meant that workplace claims – from wage disputes to discrimination or harassment claims – could often be compelled to arbitration if an employee had signed an arbitration agreement. Employers took note: since the 1990s, courts have consistently enforced employment arbitration clauses, and the use of mandatory arbitration skyrocketed. By the late 2010s, more than 55% of private-sector employees were bound by arbitration agreements, effectively barring them from suing in court over workplace issues. Arbitration’s expansion also got a boost from rulings like Epic Systems v. Lewis (2018), which allowed employers to enforce class-action waivers in arbitration, further solidifying arbitration as the default forum for many employment disputes.
Pushback against forced arbitration: As mandatory arbitration became ubiquitous, concerns grew. Employee advocates and lawmakers pointed out that arbitration can undermine employee rights – for example, by limiting discovery, eliminating the jury trial right, and often keeping outcomes confidential. High-profile movements like #MeToo highlighted how serial harassers could evade public accountability through secret arbitration proceedings. In response, some states attempted to limit or ban forced arbitration in certain cases. New York, for instance, passed a 2018 law prohibiting mandatory arbitration of sexual harassment claims. But these efforts ran into a wall: federal preemption. In 2019, a federal court struck down New York’s ban, ruling that an agreement to arbitrate a harassment claim is enforceable under the FAA despite state law, since the state ban conflicted with the FAA’s strong pro-arbitration policy. Similarly, California enacted Assembly Bill 51 to forbid employers from requiring arbitration as a condition of employment, but after years of litigation the Ninth Circuit Court of Appeals held that this too was preempted by the FAA. In short, as long as the FAA governed, state laws attempting to curb arbitration were largely invalidated. This left reformers with one clear path: change the federal law itself.
The Ending Forced Arbitration Act: After growing bipartisan support, Congress took a targeted step by passing the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (EFAA) in early 2022. Signed into law on March 3, 2022, the EFAA amends the FAA to curb forced arbitration specifically for sexual harassment and assault disputes. The motivation was to ensure survivors of workplace sexual misconduct can bring their claims to court publicly, rather than being shunted into private arbitration. Under the EFAA, any predispute arbitration agreement is invalid and unenforceable for claims of sexual harassment or sexual assault at the employee’s election. In other words, an employee alleging sexual harassment (or assault) can choose to void the arbitration clause and proceed in court, regardless of what they signed before. This protection applies to any case arising after the law’s enactment (even if the arbitration agreement was signed earlier). Notably, the EFAA doesn’t ban arbitration of these claims outright – but it gives the employee the choice. If an employee still prefers arbitration, they can arbitrate; but if they want a day in court, the employer cannot enforce arbitration for those claims. The EFAA marked a significant shift in the legal landscape, carving out a major exception to the FAA’s broad reach. Employers, attorneys, and courts have since been adjusting to this new framework, and the recent court ruling is part of that evolution.
Recent Development
A recent California Court of Appeal decision in Casey v. Superior Court (D.R. Horton, Inc.) (Feb. 2025) shut down an employer’s attempt to bypass the EFAA’s protections through a contract’s choice-of-law provision. Kristin Casey, a former employee, sued D.R. Horton and a supervisor for sexual harassment under California civil rights laws. D.R. Horton moved to compel arbitration, citing Casey’s signed agreement, which explicitly opted for California law over federal law.
The trial court initially sided with the employer, reasoning that since the contract invoked state law, the federal EFAA—which grants employees the right to litigate sexual harassment claims despite arbitration agreements—did not apply. On appeal, however, the California Court of Appeal emphatically reversed, ruling that the EFAA prevails and cannot be contractually circumvented in cases under the FAA’s scope. Given that D.R. Horton operated in interstate commerce, the FAA (with the EFAA amendment) applied, overriding the contract’s choice-of-law clause.
The court made clear that employers cannot "contract around" an employee’s federally protected right to reject arbitration for sexual harassment claims. This ruling closes a potential loophole, reinforcing that companies cannot evade the EFAA’s protections through strategic contract drafting.
Implications
This ruling has significant implications for employers, employees, and the future of arbitration agreements in the workplace. It reinforces the intent of the EFAA and provides guidance on how such agreements must be handled going forward. Here are some key takeaways:
For Employers (and Contract Drafters): Employers cannot use choice-of-law clauses to bypass the EFAA. Any arbitration agreement covering employees in interstate commerce—essentially all medium and large employers—is ultimately governed by federal law. This means sexual harassment or assault claims cannot be forced into arbitration if the employee opts for court, regardless of the contract’s wording.
Conclusion
The court’s ruling underscores the need for employers to reassess their arbitration agreements, as the EFAA’s protections cannot be bypassed through choice-of-law clauses. This decision signals that attempts to enforce arbitration for sexual harassment or assault claims will likely fail if challenged, making outdated agreements a legal risk.
Employers should take this as an opportunity to refine their contracts, ensuring compliance while maintaining control over dispute resolution. The ruling doesn’t eliminate arbitration’s value but highlights the importance of adapting to legal shifts. Staying ahead of these changes will help employers avoid costly litigation battles and reinforce sound employment practices in a shifting regulatory landscape.
