Understand forced arbitration clauses and considerations before use
How forced arbitration impacts employee rights
Employees who experience discrimination or abuse at the workplace can always file a class action lawsuit to state their case, seek damages, and defend themselves.
One would think so, but that’s not always the case.
According to the Economic Policy Institute, more than 60 million workers in the United States aren’t currently able to sue employers tes due to forced arbitration.
What’s that?
An arbitration agreement is a verbal or written contract in which two parties agree to resolve all conflicts through arbitration instead of going to state or federal court.
Arbitration is a less formal way to resolve disputes in the private sector. It involves two parties stating their cases before an arbitrator. The process moves much quicker than court cases, and fewer expenses are involved. Also, arbitration proceedings are held privately and never reach the public record.
For these reasons, employers prefer the arbitration process over class action lawsuits, leading many organizations to implement mandatory arbitration clauses for all new employees.
This works by including an arbitration clause in employment contracts.
The employee’s job offer is immediately rescinded if they disagree with the clause.
That’s where the term ‘forced’ arbitration comes from, as new hires have no choice but to agree to arbitration unless they want to lose their job opportunity.
While the arbitration process itself isn’t too controversial, mandatory arbitration agreements have been causing quite a stir in recent years.
Stay tuned to learn everything employers and employees need about forced arbitration.
Understanding the prevalence of forced arbitration
As stated in the intro, arbitration is an alternative way for businesses and individuals to resolve disputes outside court.
Arbitration has been a viable form of dispute resolution in the United States since the passing of the Federal Arbitration Act in 1926. This federal law affirms the validity of the arbitration process as long as both parties agree to it.
You can arbitrate most business disputes, including harassment claims, discrimination claims, wrongful termination, breach of contract, and illegal deductions.
These are by far the most common types of disputes that arise in the workplace, which is why employers always prefer to arbitrate instead of going to court.
Litigating costs more, and the case will reach the public record, which can negatively affect an employer’s reputation.
Since these benefits outweigh the risks, more and more companies have begun adopting mandatory arbitration clauses in their employment contracts.
Research shows that forced arbitration has become even more prevalent post-pandemic. The number of arbitration cases increased 17% in 2020 compared to 2019.
This trend has only intensified recently, with forced arbitration affecting more than 60 million American workers. The total number of forced arbitration cases also skyrocketed to 467% in 2022.
Not only did the number of forced arbitration proceedings increase during 2020, but employee and consumer win rates plummeted to new lows. According to the American Association for Justice, employees had a higher statistical chance of being struck by lightning than winning a monetary award during arbitration.
Another big reason so many employers are adopting forced arbitration is the win rates.
Employers are far more likely to win arbitration cases for various reasons (such as the repeat player effect). Currently, employee win rates stand at a meager 0.7%.
Is forced arbitration legal?
Since mandatory arbitration clauses force employees to agree to arbitration rules to keep their jobs, many have questioned their legality.
After all, is it legal to require employees to sign arbitration agreements to work at your organization?
In short, yes, but the issue has become increasingly complicated.
In 2001, the Supreme Court ruled that the FAA (Federal Arbitration Act) broadly applies to employment contracts. Thus, companies have been able to include pre-dispute arbitration agreements in job offers and employee handbooks ever since.
The FAA also permits employers to require independent contractors to sign arbitration agreements, so long as their work doesn’t involve interstate transportation.
What’s a pre-dispute arbitration agreement?
It simply means that the parties are agreeing to arbitrate any disputes that may arise in the future.
Despite the legality of these arbitration clauses, there are a few gray areas.
For example, despite class action waivers, the National Labor Relations Board (NLRB) strikes down arbitration agreements that interfere with an employee’s right to access and file charges with the NLRB.
Yet, all employers need to do to circumvent this is include a savings clause within the arbitration agreement that reminds employees of their NLRB rights.
Employers can no longer arbitrate sexual assault cases
In recent years, employees have become privy to forced arbitration clauses, causing their public opinion to plummet.
While they remain technically legal, many employees view them as a violation of their Constitutional right to a public trial in front of an impartial jury with a lawyer’s defense (as guaranteed by the Sixth Amendment).
Due to souring public opinion of mandatory arbitration provisions, employers that enact them may gain a negative reputation.
It’s currently a job seekers market, so employers must do everything they can to appeal to highly qualified candidates. For this reason, organizations should exercise caution before adding a mandatory arbitration clause in their employment contracts or employee handbooks.
Hidden arbitration clauses: A deceptive practice.
Some companies hide arbitration clauses in fine print to trick employees into signing them without realizing what they’ve done. Should a dispute arise for these employees, they will not be able to pursue their claims in court, which may come as a total surprise.
The American government faced public outrage over forced arbitration agreements. These agreements prevented sexual harassment victims from going to court. Therefore, the government took action.
This is primarily viewed as an injustice because the victims are far less likely to win their case, and the employer gets to keep all claims of sexual harassment off the public record.
Therefore, on March 3rd, 2022, President Joe Biden signed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act, which put an end to enforcing mandatory arbitration clauses regarding instances of sexual harassment.
This new law protects employees who experience sexual misconduct at work. Specifically, it allows them to present their cases in court. This right applies even if they signed an arbitration agreement with their employer.
If you’re considering adopting mandatory arbitration clauses at your organization, bear in mind that any instances of sexual misconduct can go to court and will become public knowledge.
The Forced Arbitration Injustice Repeal Act (FAIR)
While it hasn’t been passed yet, the FAIR Act has been floating around Congress for a few years.
It would end forced arbitration for good, amending the FAA to make mandatory arbitration clauses illegal.
First proposed in 2022, Congressman Hank Johnson and Senator Richard Blumenthal reintroduced the bill before Congress in April 2023.
Senator Blumenthal said, “Forced arbitration is unfair and un-American. Workers forced into a rigged arbitration system have lost one of their most powerful tools for holding employers accountable for gambling with their safety: access to justice.”
The bill has more than 80 cosponsors, and the Senate companion bill boasts 37 cosponsors.
State laws regarding forced arbitration
Besides the recent federal law, several state laws affect employers’ ability to include forced arbitration agreements.
In particular, New York was tired of waiting for Washington to take action on the sexual harassment issue, so they enacted Section 7515 of the New York Civil Practice Law and Rules back in 2018.
It voided pre-dispute arbitration agreements for all instances of sexual misconduct, which is what the federal law would mimic 4 years later.
In 2019, New York amended the statute to include all discrimination and civil rights violations.
Consider a situation where your organization operates in New York. An employee claims discrimination based on age, race, gender, sexual orientation, or national origin. In this case, they can take their claim to court, even if they signed an arbitration agreement.
Illinois, New Jersey, and Washington have all passed similar legislation in the years since.
California passed Assembly Bill 51 in 2019, perhaps the most extensive law prohibiting forced arbitration in the country.
It outright bans employers from enacting mandatory arbitration clauses for almost every type of employment law claim, so California sees far fewer forced arbitrations from employers.
However, that’s not to say that these state laws have held up in court, as they’ve only yielded mixed results.
In most instances, courts claim that these state laws are preempted by the FAA, which permits pre-dispute arbitration agreements from employers. Thus, these state laws are often deemed to be trying to skirt federal arbitration law and ignored.
The pros and cons of forced arbitration
Now that you’re familiar with the legal implications of forced arbitration, it’s time to weigh its pros and cons for employers.
While high-volume businesses in manufacturing and wholesale trade still adhere to mandatory arbitration clauses, public opinion has swayed in recent years.
Also, given the recent federal law and numerous state laws, using forced arbitration could land you in hot water with the government.
The pros
Let’s start by taking a look at the advantages forced arbitration brings to employers.
Reduced costs
Going to court isn’t cheap, as there are numerous costs involved. That’s why businesses prefer arbitration, which is far less expensive.
Lawyers specializing in arbitration are more cost-effective than class action lawyers, and the same is valid for using an arbitrator over a judge.
It’s important to note that arbitration is only more affordable for the employer.
For employees, arbitration is more of a lose-lose scenario in America.
Not only are they likely to lose the case (remember, employee win rates stand at 0.7%), but they may also incur their employer’s legal costs in addition to their own.
Quicker conflict resolution
Court cases have the unfortunate habit of dragging on for many years. This is highly detrimental for employers, as they must remain invested in the case until its conclusion.
Not only is this costly, but it’s also very time-consuming.
On the other hand, arbitration proceedings tend to wrap up in a year or less. Employers can get in, present their case, and get out – instead of twiddling their thumbs for years.
Arbitration is incredibly speedy and effective whenever the final decision is legally binding.
What does that mean?
This means that the arbitrator’s decision is final, and the involved parties cannot appeal it to a court of appeals.
If the arbitration clause is nonbinding, then the employee can appeal the arbitrator’s decision in court.
Because of this, almost all employment arbitration agreements are legally binding.
Confidentiality
This is one of the biggest perks of arbitration for employers. There’s nothing worse than your organization’s reputation taking a serious hit due to a public lawsuit.
Whether there are claims of discrimination, harassment, or other types of misconduct, employers are never eager to air their dirty laundry in public.
Doing so can negatively affect their reputation amongst consumers and potential job candidates, making it difficult to attract top talent in the future.
With arbitration, the public will never know about your inner disputes, which is a plus.
The cons
Here’s a look at the other side of the coin: all the ways that forced arbitration may negatively affect your business.
Negative public opinion
It should come as no surprise at this point that the negative stigma surrounding forced arbitration is a detriment.
Nowadays, job seekers have plenty of ways to blow the whistle about unfair employer practices, including platforms like Glassdoor and Indeed.
So, if you choose to include mandatory arbitration agreements, employees won’t take long to notice. If your primary goal is to attract top candidates for your open positions, then it may be best to steer clear of forced arbitration.
Increasing Federal and State Laws
The federal law passed in 2022 is likely only the beginning of legislation poised against forced arbitration.
There are already a plethora of state laws in place that can subvert arbitration agreements. They may not be worth pursuing if you operate in a state like New York, Illinois, or California.
The verdict: Forced arbitration clauses
Forced arbitration is technically still legal in the United States, but that’s starting to change significantly.
A federal law now grants victims of sexual misconduct an exception to arbitration clauses. Moreover, this is likely just the beginning. If your organization chooses mandatory arbitration, carefully review all relevant state laws.
More resources:
Don’t overreach with arbitration agreements
Avoid legal issues with compliant job descriptions
What is an arbitration agreement? Should employers use them?
Want more insights like these? Visit Matthew Scherer’s author page to explore his other articles and expertise in business management.