California Arbitration Loophole Closed

July 28, 2026

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California Arbitration Loophole Closed

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Governor Gavin Newsom signed Assembly Bill 2155 into law on June 30, 2026. It takes effect on January 1, 2027. This statute broadens the unenforceability of arbitration agreements in California and could have a significant effect on employers that require arbitration agreements with their employees. Under current law, when a dispute falls completely outside the reach of the Federal Arbitration Act (FAA), or falls into one of the FAA's statutory exclusions, employers could reliably fall back on state-level enforcement under the California Arbitration Act (CAA) to keep disputes out of public courtrooms.

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Separately, but related to the issue of enforcement of arbitration agreements, the California Court of Appeal for the Second Appellate District held in Decloedt v. Radnet Management, Inc., that harassment on the basis of sexual orientation is a form of sexual harassment under California’s Fair Employment & Housing Act (FEHA) and thus falls within the ambit of sexual harassment under the 2022 Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (EFAA).

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The combination of a groundbreaking appellate court ruling and a sweeping new statute taking effect on January 1, 2027, provides substantial changes to the enforceability of arbitration agreements in the employment setting in California.

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The Statute: Assembly Bill 2155

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Historically, state and federal arbitration frameworks operated independently when federal jurisdiction was lacking. The FAA explicitly exempts certain disputes from mandatory pre-dispute arbitration, such as under the 2022 Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (EFAA), as well as the FAA's long-standing "transportation-worker" exemption for employees engaged in foreign or interstate commerce. Because California’s CAA lacked parallel restrictions, employers could historically enforce arbitration under state law in instances where the FAA was inapplicable.

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Assembly Bill 2155 eliminates this statutory divergence. It amends California Code of Civil Procedure § 1281, to add that an arbitration agreement is unenforceable under the CAA "to the extent the agreement is not enforceable under the Federal Arbitration Act." This directly imports federal exclusions into state law, preventing employers from using the CAA to compel arbitration in cases that federal policy seeks to protect.

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The Case: Decloedt v. Radnet Management, Inc.

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While Assembly Bill 2155 ties state law to federal boundaries moving forward starting in January 2027, Decloedt v. Radnet Management, Inc. (July 2026) immediately impacts certain sexual harassment claims. The Court ruled that harassment based on sexual orientation is inherently linked to an employee’s sex under the Fair Employment and Housing Act (FEHA). Consequently, sexual orientation harassment claims qualify as sexual harassment under the EFAA, granting affected employees an immediate right to bypass arbitration and litigate in open court.

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The Combined Impact for Employers and Employees

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Together, these legal developments reshape dispute resolution across California:

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• Timeline Distinction: The Decloedt ruling impacts sexual orientation claims immediately under federal law, whereas AB 2155’s broader statutory ban on state-law fallbacks (affecting transportation workers and other exclusions) takes effect on January 1, 2027.

• Elimination of State Fallbacks: Employers can no longer rely on the CAA to compel arbitration for EFAA claims, transportation-worker disputes, or any other matter exempt under the FAA, regardless of whether interstate commerce is proven.

• Expanded EFAA Scope: Bypassing arbitration under the EFAA now explicitly extends to FEHA sexual orientation harassment claims.

• Broad Case Scope (Joint Claims): Under federal EFAA precedent, when a lawsuit includes a qualifying sexual harassment claim, courts generally keep the entire complaint, including related wage-and-hour or discrimination claims, in public court rather than splitting the case into arbitration.

 

Practical Employer Action Plan

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In response to these shifting boundaries, employers and legal practitioners should take immediate steps before 2027:

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1. Audit Existing Arbitration Agreements: Review current arbitration agreements to ensure compliance with these new limits.

2. Review Policies and Training: Review and update policies and training to address sexual orientation harassment claims.

3. Assess Active Litigation: Evaluate pending claims and litigation to determine possible adverse publicity or exposure to litigation in court rather than arbitration.

 

 

For more information, contact us:
 

Email: paul@amanteHR.com

Tel.: (714) 309-9677

 

This article is for informational purposes only. It is not intended to be, nor shall it be construed as legal advice or guidance.

Consult with a professional for appropriate advice and guidance.