Understand Forced Arbitration Clauses and considerations before use

March 5, 2024

Should an employee experience discrimination or abuse at the workplace, they can always file a class action lawsuit to state their case, seek damages, and defend themselves, right?

One would think so, but that’s not always the case.

According to the Economic Policy Institute, the option to sue employers isn’t currently available to more than 60 million workers in the United States due to something called forced arbitration.

What’s that?

An arbitration agreement is a verbal or written contract where two parties agree to resolve all conflicts through the process of arbitration instead of going to state or federal court.

Arbitration is a less formal way to handle dispute resolution in the private sector, and 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 always held in private, and they never reach the public record.

It’s for these reasons that 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.

Should the employee refuse to agree to the clause, their job offer is immediately rescinded.

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 to know 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 their disputes outside of 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. There was a 17% increase in the number of arbitration cases in 2020 compared to 2019.

This trend has only intensified in recent years, with forced arbitration now 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 they did of winning a monetary award during arbitration.

That’s another big reason why so many employers are adopting forced arbitration – the win rates.

Employers are far more likely to win arbitration cases for a variety of 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 if they want to keep their jobs, many have questioned their legality.

After all, is it actually legal to require employees to sign arbitration agreements to work at your organization?

In short, yes, but the issue has become increasingly complicated.

Back in 2001, the Supreme Court ruled that the FAA (Federal Arbitration Act) broadly applies to employment contracts. Thus, companies have been able to get away with including 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 types of 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 get around this is to include a savings clause that reminds employees of their NLRB rights within the arbitration agreement.

Employers Can No Longer Arbitrate Sexual Assault Cases

Employees have become privy to forced arbitration clauses in recent years, causing public opinion of them 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 the defense of a lawyer (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 it’s crucial for employers to do everything they can to appeal to highly qualified candidates. For this reason, organizations should exercise caution before deciding to add a mandatory arbitration clause in their employment contracts or employee handbooks.

Some companies hide arbitration clauses in fine print to trick employees into signing them without even realizing what they’ve done. Should a dispute arise in the future for these employees, they will not be able to pursue their claims in court, which may come as a total surprise.

Due to public outrage, the American government decided to take collective action regarding arbitration agreements that force victims of sexual harassment to arbitrate instead of going to court.

This is largely 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.

That means employees who experience sexual misconduct at the workplace are able to present their cases before a court of law, regardless of whether they’ve signed an arbitration agreement with their employer or not.

If you’re considering adopting mandatory arbitration clauses at your organization, bear in mind that any instances of sexual misconduct are able to 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 now.

It would put an end to forced arbitration for good, as it would amend 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, there are several state laws that 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 instances of discrimination and civil rights violations.

This means if your organization operates in New York and an employee claims they were discriminated against due to their age, race, gender, sexual orientation, or national origin – they’ll be able to take their claim to court – even if they have a signed arbitration agreement with you.

Illinois, New Jersey, and Washington have all passed similar legislation in the years since.

California passed Assembly Bill 51 in 2019, which is perhaps the most extensive law prohibiting forced arbitration in the entire country.

It outright bans employers from enacting mandatory arbitration clauses for just about every type of employment law claim. California sees far less forced arbitration from employers because of this.

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. These state laws, then, are often deemed as trying to skirt federal arbitration law, and are 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 swear by mandatory arbitration clauses, there’s no denying that public opinion has swayed in recent years.

Also, given the recent federal law and numerous state laws, using forced arbitration poses the risk of landing 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, as it’s far less expensive.

Lawyers specializing in arbitration are more cost-effective than class action lawyers, and the same is true 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’re obligated to remain invested in the case until its conclusion.

Not only is this costly, but it’s also very time-consuming.

Arbitration proceedings, on the other hand, 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 especially speedy and effective whenever the final decision is legally binding.

What does that mean?

It means that the arbitrator’s decision is final, and the involved parties aren’t able to take their case before a court of appeals.

If the arbitration clause is nonbinding, then the employee has the option to 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 taking a serious hit to its reputation 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 definitely 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.

In today’s age, 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, it won’t take long for employees to take 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, so they may not be worth pursuing if you operate in a state like New York, Illinois, or California.