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Mandatory arbitration clauses in employment contracts: Are they legal? Do they make sense?

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Picture this: you are searching for a new job and get an offer from a great company. The benefits and pay are good, the commute seems reasonable, and you’ll be working with experts in your field. You enthusiastically accept and start looking over the paperwork and notice one small catch:  There is a mandatory arbitration clause that says you agree to arbitrate any future legal claim you have against the company. In other words, you give up your right to go to court for something not yet even known. Would you still take the job?

If you said yes, you’re not alone. Around 60 million American workers are subject to mandatory employment arbitration procedures. Mandatory arbitration is a legal clause, usually in an employee’s contract or via a separate document, that requires employees to mediate any legal claims against their employer through arbitration instead of going to court. Typically, these clauses are in the fine print of an employment contract, so employees often are unaware or do not pay close attention that they are signing away these rights until they run into a legal issue and are told they don’t have the right to sue but instead must arbitrate. However, the recent rise in sexual harassment claims has caused employers some headaches when it comes to their mandatory arbitration clauses and has inspired larger companies like Google to change their policies and stop using mandatory arbitration clauses.

Are mandatory arbitration agreements legal?

Yes. The Supreme Court of the United States (SCOTUS) has ruled that mandatory arbitration agreements in employment contracts are legal. In Epic System Corp. v. Lewis, 138 S. Ct 1612 (2018),a case involving employees of a Wisconsin healthcare software company, Epic’s employees were notified that the company was changing its policy to require using individual arbitration for any disputes. That meant that employees could not file a class action against the company or pursue individual claims in court. A year later, an employee along with several of his colleagues, attempted to sue the company in a class action suit for overtime violations. SCOTUS held that it is legal for an employer to mandate that an employee sign an arbitration agreement, and, if the employee refused, to not hire the employee. This was seen as a huge victory for employers.

Are mandatory arbitration agreements always legal?

While mandatory arbitration agreements are legal, they don't apply to independent contractors in the interstate trucking industry. On Jan. 15, 2019, SCOTUS held in New Prime Inc. v. Oliveira that a trucking company could not compel its drivers, which it classified as independent contractors, to arbitrate their wage and hour claims against the company because Congress intended to exempt all interstate transportation workers from the Federal Arbitration Act (FAA).  In New Prime Inc, Dominic Oliveira was hired as an independent contractor for a trucking company. His independent contractor agreement contained an arbitration clause. Later, Oliveira filed a putative class action against New Prime for failure to pay truck drivers minimum wage. New Prime tried to compel arbitration based on the clause in Oliveira’s contract but he rebutted that this clause did not apply for “workers engaged in foreign or interstate commerce” like truck drivers. SCOTUS agreed. Therefore, Oliveira was exempt from the mandatory arbitration clause in his independent contractor agreement.

Can the employer mandate that employees submit to mandatory arbitration in a class action?

Class action arbitration is such a departure from ordinary, bilateral arbitration of individual disputes, that SCOTUS ruled on April 24, 2019, in Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407 (2019), that courts may compel class action arbitration only where the parties expressly declare their intention to be bound by such actions in their arbitration agreement. In Lamps Plus, Inc., an employee, Frank Varela, filed a putative class action suit against his employer, Lamps Plus, after a data breach of employee information. Lamps Plus moved to compel arbitration based on a mandatory arbitration clause in Varela’s employment contract.

What are the benefits of arbitration?

Although arbitration tends to disadvantage employees, there are several reasons many believe arbitration is preferable to litigation. First, arbitration is a less formal and faster process than traditional litigation. Employees don’t need to wait months for a court date or nervously prepare for the skeptical eyes of a judge and jury. For some, waiting for their day in court is more anxiety inducing than the trial itself, so having the process done quickly and informally is preferred. Employers also benefit from the streamlined process because they don’t have to devote as many resources to arbitration as they would for litigation. Second, arbitration hearings are private and not a matter of public record. While this can be seen as a drawback for employees as their stories can’t be shared with the greater public, some prefer keeping their legal issues private. This a clear benefit for employers as their workplace mishaps and abuses are prevented from being exposed. Last, arbitration may allow for both parties to choose their arbitrator. When an arbitration clause provides for both parties to consent to the arbitrator, it allows both the employer and employee to decide who will hear their case as opposed to litigation where judges are chosen at random. While it can prevent employees from having their day in court, arbitration can be beneficial to both employers and employees who want a speedier and confidential outcome.

What are the downsides of arbitration?

With the uptick in sexual harassment claims over the past two years, employees are beginning to run into the pitfalls of arbitrating their claims. Confidentiality in resolving claims tends to favor the employer over the employee. Recently, Google ended mandatory arbitration clauses in employment contracts after employees organized a 20,000 person walkout. Many cited that they did not feel safe knowing their employer’s illegal workplace actions could be hidden behind a veil of confidentiality. Because the employer also typically has deeper pockets then the employee, the employer typically has the ability to hire lawyers and put on a more prepared case then the employee, especially the employee who is not provided or cannot afford an attorney to present his or her case to the arbitrator. Also there is no ability to appeal a final arbiter award – instead it is final and not subject to any further oversight. According to a study by the Economic Policy Institute (EPI), conducted in 2017 and enhanced in 2018, there is growing evidence to suggest mandatory arbitration tends to disadvantage employees and advantage employers. This study has led EPI to state on its website (epi.org/research) that "Forced arbitration, especially where it prohibits the use of a class action of any kind, can be very destructive of employee rights, undermines labor standards, and contributes to wage suppression, discrimination, and poorer working conditions."

Is there a growing movement against arbitration?

Mandatory arbitration clauses have been a popular employment tool, especially for large companies. However, the winds are starting to shift with regard to mandatory arbitration clauses. In October 2018, Kentucky became the first state to ban mandatory arbitration as a condition of employment via a ruling of the Kentucky Supreme Court in Northern Kentucky Area Development Dist. v. Snyder. Several states including New Jersey, California, Washington, New York, Vermont and Massachusetts also have banned, or are working to ban, this practice. Moreover, in February 2019, federal legislation named the FAIR (Forced Arbitration Injustice Repeal) ACT was introduced to ban mandatory arbitration agreements in disputes related to employment for both employees and independent contractors. The federal legislation appears to be gaining non-partisan support, signaling a possible future shift in the use of mandatory arbitration agreements in the employment arena.

Attorneys Colleen M. Quinn and Kate Miceli provide employment law services at Locke & Quinn, lockequinn.com, and can be reached at quinn@lockequinn.com and miceli@lockequinn.com.