Kirsty Powell filed a lawsuit against Long Beach City Council after she was made to take off her headscarf following her arrest in 2015.
Ms Powell’s repeated requests to be dealt with by a female officer were ignored, and she spent the night in custody without her headscarf.
The department has since changed its policy on religious headwear.
Female officers are now required to remove headscarves, away from male officers and inmates, and only “when necessary for officer safety”, Long Beach assistant city attorney Monte Machit told the Los Angeles Times.
However, Long Beach City Council agreed to settle the suit, the Council on American-Islamic Relations (CAIR) said.
CAIR, which launched legal action for Ms Powell, said “police officers forcibly removed her hijab in view of other male officers and dozens of inmates”.
She later “described the experience as deeply traumatizing,” CAIR said in a statement.
Local news website ABC7 reported she had three outstanding warrants against her name, which have since been cleared.