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Arbitration Use by Employers Up as High Court Affirms Validity

Aug. 24, 2022, 9:43 AM

States’ attempts to ensure employees can take their workplace disputes to court are seeing their efforts chipped away by the US Supreme Court.

Forty-three states have laws focused on alternative dispute resolution between employers and employees, according to the Legal Information Institute at Cornell Law School. Many of those statutes say that arbitration language contained in various types of employment aren’t enforceable.

The state laws can run afoul of federal preemption, which generally holds valid arbitration agreements are enforceable and should be treated like any other legally formed contract between employers and employees.

The US Supreme Court has consistently held employers can enforce individual arbitration agreements as well as class action language prohibiting an employee class from launching a collective complaint through arbitration against an employer.

The arbitration-friendly rulings have led more employers to use the agreements in an attempt to mitigate exposures to expensive jury-trial outcomes, especially now as workers return to offices following the worst episodes of the Covid-19 pandemic, the lawyers said.

“I would estimate about half of the employee population that my clients have are subject to arbitration agreements. And that’s a higher percentage than three years ago. Three years ago I would have said a third,” said Robin Samuel, a partner in Baker McKenzie’s employment and compensation practice group.

Arbitration or Jury?

Arbitration agreements show up in employment contracts directing parties to resolve any dispute in proceedings outside of court. State judges typically decide whether an arbitration agreements are enforceable if employees sue their employers.

Employers typically prefer arbitration. It can alleviate the threat of having to pay out enormous awards granted by juries sympathetic to plaintiffs. The proceedings also can lead to quicker resolutions than a jury trial.

Workers might not even know they’re barred from going to court. Many times, employees sign a stack of papers when they’re first hired and that includes an arbitration agreement, said Terri Gerstein, director of the State and Local Enforcement Project at Harvard Law School.

Federal Arbitration Act

The high court has consistently ruled legally formed arbitration agreements are enforceable, including the terms of arbitration the parties select, and that the Federal Arbitration Act preempts state authority when state law outright bans arbitration of a particular type of claim.

In AT&T Mobility LLC v. Concepcion (2011), justices ruled the Federal Arbitration Act preempted a California state law asserting some class-action waivers are unenforceable because the state law interfered with attributes of the agreements. In Epic Systems Corp. v. Lewis (2018), the high court held that arbitration proceedings must be enforced, regardless of the National Labor Relations Act.

The high court has, however, recognized some arbitration restrictions:

Some state arbitration statutes are intended to complement the Federal Arbitration Act.

  • In Illinois, a state law establishes a separate set of arbitration rules when a health-care provider is involved.
  • A Connecticut law empowers arbitrators to award punitive damages against employers alleged to violate the state’s arbitration laws.
  • In Idaho, a state statute exempts agreements between employers and employees from its general protections against mandatory alternative dispute resolution.
  • Several states, including Nevada and Texas, require parties to use arbitration if disputed amounts don’t exceed a specific monetary amount.

Gerstein said there are ways states could provide additional employee protections without running afoul of the federal law. They could pass whistleblower-type legislation allowing individuals to bring employee-rights claims against employers. Such legislation would need to be carefully drafted so it couldn’t be preempted, she said.

Whether those state laws remain is up for debate.

“I think the more interesting thing that’s probably going on right now is how are the courts going to ultimately square these kinds of laws with the pre-emptive force of the Federal Arbitration Act. The Supreme Court has been pretty consistent about keeping that scope broad and striking down state law that would seem to interfere with the scope of the FAA,” said Foley & Lardner LLP partner and labor and employment attorney Christopher Ward.

Not Always Preferable

Some employers question whether resolving disputes in a comparatively secretive, nontransparent fashion aligns with their corporate culture and actually attains the supposed efficiencies. And they question whether the agreements will actually be enforced in court, especially because some of the state laws contain exceptions to forced arbitration.

The notion employers will always receive a more favorable outcome using arbitration is unfounded, the lawyers said. “There is a perception that arbitration is a completely employer-tilted forum, and I don’t think that perception is accurate,” said Ward, who represents employers.

“Arbitration is not a panacea. It’s got some advantage for employers and it’s got some disadvantages for employers. And there are definitely cases I have looked at and thought, ‘I don’t want to do this one in arbitration, I’d rather just do this one in court,’ for a host of reasons,” he said.

Opponents claim forced arbitration, particularly when it is required as a condition of employment, deprives employees of access to the judicial process. Banning class-action arbitration can intimidate workers who don’t want to fight a large employer alone. It can also be difficult to find a private-sector lawyer to take a case.

Prohibiting class action arbitration proceedings can lead to plaintiffs’ lawyers filing hundreds of individual complaints alleging the same violation. “I think the most significant development is how plaintiffs’ lawyers have turned these imposed agreements against employers with mass filings of individual arbitration demands,” Martin Malin, Illinois Institute of Technology Kent College of Law professor emeritus, said in an email. “Such actions place tremendous financial pressure on the employer.”

A plaintiffs’ lawyer filing 1,000 individual claims instead of filing once for a class could result in an employer having to pay more than $2 million up front in arbitration fees, said Malin, who has served as an court-appointed arbitrator.

Allowing disputes to go to trial also enables private lawyers to help enforce laws rather then having to rely solely on the resources of states, Gerstein said. “People want to get to open court, with a judge,” she said.

To contact the reporter on this story: Stephen Joyce in Chicago at sjoyce@bloomberglaw.com

To contact the editors responsible for this story: Fawn Johnson at fjohnson@bloombergindustry.com; Katherine Rizzo at krizzo@bgov.com