Sixty million American workers currently all have one thing in common: they are all subject to mandatory arbitration agreements. According to a study conducted by the Economic Policy Institute, approximately more than half of private-sector nonunion employees are subject to mandatory arbitration agreements relating to their employment. While these contract tools can be helpful to small employers and entrepreneurs who hire employees, there are several pitfalls that employers must be aware of when utilizing them. This blog post will detail what mandatory arbitration agreements are, their enforceability, and the most recent federal legislation regarding these agreements.
What Are Mandatory Arbitration Agreements?
Mandatory arbitration agreements require both parties to the agreement to resolve any disputes related to the contractual relationship by an arbitrator. Essentially, these agreements prevent the parties from having their day in court because each party waives the right to file a lawsuit regarding the dispute. The phrase “mandatory arbitration agreement” can refer to either a stand-alone document or a provision situated within an employment agreement. Mandatory arbitration agreements have become so popular, due to their predictability and inexpensive nature, that the majority of contracts consumers and employees sign contain some form of arbitration provision.
Mandatory arbitration agreements in employment contracts relate specifically to employment-related disputes. For example, if an individual has been discriminated against by their employer, an arbitration agreement would prevent them from bringing their claim before a court. They would be required to submit to an arbitrator, typically one that is selected by the business. While theoretically these agreements are optional and an employee can negotiate around them, there are concerns that employees do not have equal bargaining power in this transaction.
Enforcement Generally
Mandatory arbitration agreements in employment contracts are legally enforceable. The Supreme Court issued a decision in 2001 which held that “agreements to arbitrate employment-related disputes are enforceable under the Federal Arbitration Act (FAA) for disputes between employers and employees.” The FAA was enacted in 1925 and requires that judges recognize written arbitration agreements. The Court’s 2001 decision explicitly stated that the FAA applies to employment contracts and that the court must recognize them as binding. In general, arbitration agreements will be held to be legally enforceable.
However, as previously stated, there are concerns about whether an employee has equal bargaining power during this transaction. Contract principles still apply to employment agreements and employers must ensure that the arbitration provisions are not unconscionable. When determining whether a provision is unconscionable, a court will look to whether the provision is so one-sided or harsh on one party that it would be unfair to enforce. It will also look to whether the employee was pressured to sign or whether they understood the terms of the agreement.
EEOC and NLRB Guidance
While employment-related arbitration agreements are generally enforceable, there are several exceptions that small business owners should be aware of. First, an enforceable arbitration agreement does not prevent an employee from bringing a claim with the Equal Employment Opportunity Commission (EEOC). An employee is still able to file a charge and have the EEOC investigate their claim. The EEOC is also able to file litigation for individual-specific relief, regardless of whether an arbitration agreement is in place. Employees are required to file a claim with the EEOC for discrimination claims before they can file with the courts, even if they do not have an arbitration agreement. An agreement does, however, prevent an employee from pursuing a discrimination claim if the EEOC decides to not pursue litigation following an investigation.
Second, arbitration agreements are also limited by the National Labor Relations Board (NLRB). Individual, but not collective, agreements are enforceable and do not violate “protected concerted activity under the National Labor Relations Act (NLRA).” Agreements that interfere with employees’ rights to access their rights under the NLRA are still prohibited. However, employers can place a “savings clause” in the agreement that reminds employees of their rights under the NLRA, which will save their arbitration agreement from being unenforceable. Employers must keep this in mind when drafting an arbitration agreement.
Federal and State Enforcement
In addition to limitations from the EEOC and NLRB, arbitration agreements in employment contracts can also be limited by the federal and state government. In 2022, the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act, a bi-partisan bill, was signed by President Joseph Biden. The Act makes it illegal to require arbitration for sexual misconduct claims. This was enacted in response to the increase in these types of agreements and the increase in public disdain for them. Many people view mandatory arbitration agreements as a way of silencing victims and prohibiting them from seeking justice from the court system. Due to these reasons, employers are prohibited from including these types of provisions in employment contracts.
Also, several states have adopted their own legislation to limit these types of agreements. New York, Illinois, Washington, and New Jersey prohibit mandatory arbitration of sexual harassment claims. These states do not allow employers to mandate arbitration for these claims as a condition of employment.
Conclusion
When employers determine whether to include mandatory arbitration agreements in employment contracts, they should consider the ways in which the agreements can be limited by the EEOC, NLRB, and state and federal regulations. These agreements can be extremely valuable because they are inexpensive and lead to predictable results. However, they must be drafted accordingly to avoid violating the many regulations and guidelines listed above. If an employer still believes that these provisions are necessary for their business, they should consider consulting an employment lawyer who specializes in drafting these agreements to avoid violating any state or federal regulations.
Sources:
Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001).
https://www.consumerfinance.gov/ask-cfpb/what-is-mandatory-binding-arbitration-en-739/
https://www.epi.org/publication/the-growing-use-of-mandatory-arbitration/
https://www.wshblaw.com/experience-employer-unable-to-enforce-arbitration-agreement
Photo Sources:
https://greenwaldllp.com/law-clips/mandatory-arbitration-agreements-legal-company-use/
https://www.i-sight.com/resources/39-tips-for-conducting-a-sexual-harassment-investigation/
https://en.wikipedia.org/wiki/National_Labor_Relations_Board
Hi Abbie,
I really liked that you started your post with a statistic showing how many people are subject to mandatory arbitration agreements. I think it was a good way to show the magnitude of this issue. I also liked how you broke down the various laws that impact the enforceability of arbitration agreements. I think your post would be a great starting place for a business that is considering subjecting their employees to mandatory arbitration agreements.
Great post Abbie! The topic choice is great for entrepreneurs to both keep arbitration agreements in mind in the first place and to see the limitations of their enforceability. I have looked into this topic a lot with regard to nursing homes, but it’s very interesting to see this from the employment law perspective. Something else I would have be interested to see would be how courts have decided on certain unconscionability issues with regard to these employment arbitration agreements, but I think that could be an entire article in itself. Overall I enjoyed that this post provides all of the clear-cut limitations for employers to consider, while still having them keep the principles of contract in mind.
Great job on this Abbie! I thought you did a great job organizing your post and were able to keep a niche subject still quite interesting. I liked your use of photos and I liked how you were able to keep things succinct, like there’s a part where you mention a Supreme Court case and you were able to keep the details down to like one sentence. Overall there were a ton of different areas where you could have easily been sidetracked, with all the different agencies, legislation, and jurisdictional issues, but you did an excellent job staying focused on your topic. Nice work!