California Employers: Five Steps to Keep Your Arbitration Agreement Enforceable in 2027

When a wage-and-hour class action or PAGA lawsuit lands, the arbitration agreement is often the single most important document in the file. I made that point in my article on what businesses need to know about defending a class action and PAGA lawsuit, and the questions I said to answer in the first weeks of a case still apply: is the agreement enforceable, does it contain a valid class action waiver, and how many employees actually signed it?

This week I want to move that conversation earlier, to before a lawsuit is filed, because two dates on the calendar make now the right time to pull the agreement out of the onboarding packet and read it again. On January 1, 2027, AB 2155 takes effect and removes a fallback employers have long relied on to enforce arbitration under California law. And on November 3, the California Supreme Court will hear argument in Leeper v. Shipt, Inc., which will decide whether a PAGA plaintiff can avoid arbitration simply by leaving the individual claim out of the complaint.

Meanwhile, the Courts of Appeal have spent the last few months showing how agreements fail, and very few of those losses had anything to do with whether arbitration is allowed. They failed because of a related document signed at the same time, an outdated form, a scope clause that was too narrow, or how the employer handled the case after it was filed. Here are five things to fix now.

1. AB 2155 removes the state-law safety net. Know which of your employees fall outside the FAA.

For years, when an employee successfully argued that the Federal Arbitration Act did not apply, employers had a second argument: compel arbitration under the California Arbitration Act instead, which has no transportation-worker exemption of its own. Governor Newsom signed AB 2155 on June 30, and it closes that door. Beginning January 1, Code of Civil Procedure section 1281 provides that an arbitration agreement is not enforceable under California law to the extent it is not enforceable under the FAA.

Two federal carve-outs matter most:

• The FAA’s transportation-worker exemption (9 U.S.C. § 1). It covers transportation workers engaged in interstate commerce, including workers who load and unload goods moving across state lines (Southwest Airlines Co. v. Saxon (2022) 596 U.S. 450). Courts have generally drawn the exemption narrowly, but employers with drivers, delivery staff, warehouse workers, or anyone handling goods in the last leg of an interstate shipment should expect the argument, and after January 1, losing it means losing arbitration for that group entirely.
• The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (EFAA). An employee with a covered sexual harassment or sexual assault claim can choose court. California courts are reading the EFAA broadly. In Decloedt v. RadNet Management, Inc. (2026) 121 Cal.App.5th 732, the court held that harassment based on sexual orientation was exempt from arbitration under the EFAA.

AB 2155 does not ban arbitration, and for most employees whose agreements are governed by the FAA, nothing changes. The work is to identify the groups for whom it does. Map your workforce against the transportation-worker exemption, look at whether your agreement leans on the California Arbitration Act as a backup, and decide now what your strategy is for any group that may fall outside the FAA, rather than learning it in an opposition brief.

2. Read every onboarding document together, because a court will.

The most common way a sound arbitration agreement fails is not its own text. It is another document signed the same day.

In Fuentes v. Empire Nissan, Inc. (2026) 19 Cal.5th 93, the California Supreme Court held that small, difficult-to-read print bears on procedural unconscionability, rather than establishing substantive unconscionability. The Court emphasized that a high degree of procedural unconscionability requires correspondingly less substantive unfairness under California’s sliding-scale analysis. It also remanded for further consideration of provisions that potentially allowed the employer to pursue claims concerning unfair competition, trade secrets, and confidentiality in court while requiring the employee to arbitrate claims against the employer.

The Court of Appeal applied that concern in Cluck v. GEO Secure Services, LLC (2026) 122 Cal.App.5th 249. The employee signed both an arbitration agreement and a confidentiality agreement during onboarding. Read together, the agreements required the employee to arbitrate the types of claims he was most likely to bring, while allowing the employer to litigate its likely confidentiality, competition, and nonsolicitation claims in a Florida court. The resulting lack of mutuality supported a finding of substantive unconscionability. The court also found procedural unconscionability in the opt-out process, which required a new hire to obtain an employee number, prepare a separate written statement, and send it to the legal department within 30 days.

What to check:

• Every carve-out, in every document. Confidentiality, non-solicitation, and invention-assignment agreements, offer letters, and handbooks. If any of them sends the employer’s claims to court, fix the inconsistency.
• Mutuality. Claims the employer is likely to bring should be arbitrated on the same terms as claims the employee is likely to bring.
• Forum and choice of law. An out-of-state forum for the employer’s claims against a California employee is a red flag on its own (see also Labor Code § 925).
• Presentation. Legible font, a standalone document, and an opt-out process (if you offer one) that a new hire can actually use. I have long favored keeping arbitration agreements separate from the employee handbook (see my earlier article on why).

3. Make sure the agreement covers the claims you will actually face, and know which version each employee signed.

Scope language written for a different purpose can leave the most important claims outside arbitration. In Morales v. Superior Court (2026) 122 Cal.App.5th 239, San Diego Gas & Electric terminated an employee after nearly 20 years. She sued under FEHA and CFRA and for wrongful termination. The employer moved to compel arbitration under the employment agreement she signed when she was hired in 2005, which required arbitration of disputes concerning the agreement or conduct allegedly violating it. The Court of Appeal held that the clause reached only disputes about the employment agreement itself, so her discrimination, leave, and wrongful termination claims stayed in court.

Version control is the related problem. In Hickenbottom v. Medical Solutions LLC (Cal. Ct. App. 2026), the employer’s first motion to compel relied on an arbitration provision in its handbook, and the trial court denied it because that provision had been superseded. The employer then moved again under a different agreement. (The procedural consequence of that second motion is discussed in point four.)

For employers with long-tenured staff, multiple acquisitions, or several rounds of onboarding paperwork, this is where the risk sits:

• Scope. The clause should expressly reach all claims arising out of or relating to the employment relationship or its termination, including statutory wage, discrimination, leave, and retaliation claims, with only the exclusions the law requires.
• Inventory. Know which form each current employee signed, and when. A 2005 agreement and a 2024 agreement may say very different things.
• Supersession. Make sure the current agreement clearly states which earlier agreements it replaces, so there is no fight over which document controls.
• The signature count. If a meaningful share of your workforce never signed, or signed an outdated form, a new rollout with proper consideration and clear communication is worth discussing with counsel. As I noted in August, the percentage of the workforce covered drives everything from motion strategy to the settlement number.

4. An agreement only works if you move promptly once you are sued.

The best-drafted agreement can be lost in the first 90 days of a lawsuit. Under Quach v. California Commerce Club, Inc. (2024) 16 Cal.5th 562, an employee no longer has to show prejudice to establish that an employer waived arbitration. The question is whether the employer’s conduct is inconsistent with an intent to arbitrate.

Mitchell v. Lilac Solutions, Inc. (Cal. Ct. App. 2026) shows how that plays out. The employer answered, pursued three months of extensive discovery, filed cross-claims, and moved to compel only after the employees filed an anti-SLAPP motion. The court upheld a finding of waiver. The employer argued that the EFAA made an earlier motion impractical because the complaint included sexual harassment allegations, but the court said it could have promptly sought a stay or limited discovery to arbitrability. Listing arbitration as an affirmative defense did not preserve the right.

Hickenbottom adds a procedural trap. Because the employer’s second motion sought the same relief as the first, the court treated it as a renewed motion under Code of Civil Procedure section 1008. The employer had not filed the required affidavit identifying new facts or law and explaining why the second agreement was not presented the first time, so the trial court lacked jurisdiction to consider it and the appeal was dismissed.

The practical rules:

• Decide on arbitration at the outset. Raise it in the first responsive filing, and if you intend to compel, do it before engaging on the merits.
• When the complaint mixes arbitrable and EFAA claims, seek a stay or limited, arbitrability-focused discovery rather than litigating the case.
• Bring every agreement the first time. Find all potentially applicable agreements, handbook provisions, and acknowledgments before the first motion is filed, because you may not get a second.
• Be able to prove the signature. Keep signed agreements, electronic-signature audit trails, and onboarding records where you can produce them quickly.

5. Prepare for Leeper: make sure the agreement is built for PAGA either way.

Under Viking River Cruises, Inc. v. Moriana (2022) 596 U.S. 639 and Adolph v. Uber Technologies, Inc. (2023) 14 Cal.5th 1104, an employer can compel the plaintiff’s individual PAGA claim to arbitration, with the representative (non-individual) claims typically stayed while the arbitration proceeds. That sequencing has become one of the most valuable tools in PAGA defense.

Plaintiffs have responded with “headless” PAGA complaints that plead only non-individual claims, so there is nothing to compel. In Leeper, the trial court accepted that approach. The Court of Appeal reversed, holding that every PAGA action necessarily includes an individual component, which must be sent to arbitration while the rest is stayed. The Supreme Court took up the question on its own motion, and argument is set for Tuesday, November 3.

The decision will matter to every employer with an arbitration program, and you do not need to wait for it to prepare:

• Make sure the agreement expressly covers individual PAGA claims and addresses representative PAGA claims in a way that is enforceable under Viking River and Adolph.
• Check the class action waiver and the severability clause. A poorly drafted waiver, or a clause providing that the entire agreement falls if any part of the waiver is unenforceable, can cost you far more than the PAGA question itself.
• Plan for both outcomes. If the Court affirms, an employer can compel the individual PAGA claim to arbitration even when the plaintiff leaves it out of the complaint, and a win in arbitration on the individual claim gives the employer a strong argument that the plaintiff was never an aggrieved employee with standing to pursue the representative case. If the Court reverses, plaintiffs with arbitration agreements will plead representative-only PAGA claims and keep them in court, and the agreement’s value will rest on individual and class claims. PAGA exposure would then turn on the merits and penalty reduction, which is where documented compliance and the reasonable-steps penalty caps do their work.

I will cover the argument and what the justices signal in a future column.

The bottom line: An arbitration agreement with a class action waiver remains one of the most effective tools a California employer has to limit wage-and-hour exposure, but only if it is enforceable, covers the claims you will face, is consistent with everything else in the onboarding packet, and is invoked promptly. AB 2155 takes effect in ten weeks and Leeper will be argued in less than two. That makes this quarter the time to inventory which agreements your employees signed, read them alongside every related document, update the scope, carve-out, and severability language, and identify any groups that may fall outside the FAA, before a plaintiff’s lawyer does it for you.