Last month, the United States Supreme Court held that class action waivers in employment arbitration agreements are enforceable under the Federal Arbitration Act (“FAA”). Epic Systems Corp. v. Lewis, No. 16-285; Ernst & Young LLP, et al. v. Morris, et al., No. 16-300; National Labor Relations Board v. Murphy Oil USA, Inc., et al., No. 16-307 (May 21, 2018). Arbitration agreements requiring employees to pursue work-related claims in arbitration, rather than in court, have long been enforced pursuant to the FAA. In 1991, the Supreme Court in Gilmer vs. Interstate/Johnson Lane Corp. [1] held that by agreeing to arbitrate, parties trade “procedures and opportunity and review of the courtroom for the simplicity, informality, and expedition of arbitration.” [2] In Circuit City Stores vs. Adams [3], the Court said there are “real benefits” to arbitration, and those benefits do not “somehow disappear” in the “employment context.” “Arbitration agreements allow parties to avoid the cost of litigation, a benefit that may be of particular importance in employment litigation.”

In 2016, approximately 31,000 federal lawsuits were filed in five categories of employment cases: “civil rights cases: employment,” “ADA” (Americans with Disabilities Act), “FLSA” (Fair Labor Standards Act), “ERISA” (Employee Retirement Income Security Act), and “FMLA” (Family and Medical Leave Act). The vast majority of the 8,686 FLSA lawsuits filed in 2016 were filed as class or collective actions. In addition to the 31,000 federal lawsuits filed in 2016, approximately 195,000 employment lawsuits per year were filed in state courts of general jurisdiction.

From 1991 to roughly 2000, those workers who were subject to mandatory arbitration rose from just over 2% (in 1992) to almost a quarter of the workforce by the year 2000. Since the early 2000s, the share of workers subject to mandatory arbitration has more than doubled and now exceeds 55%. Among companies with 1,000 or more employees, 65.1% have mandatory arbitration procedures.

Below are some thoughts for and against implementing an alternative dispute resolution policy that includes binding arbitration.

For

  • A potential reduction in the number of claims filed as many plaintiff lawyers shy away from matters which can only be arbitrated.
  • A likely reduction in employment practice insurance (“EPLI”) premiums.
  • Very important is the reduced risk of a “runaway” jury verdict.
  • Arbitration is usually quicker and more streamlined than typical civil litigation in either state or federal court.
  • The findings are, for the most part, final and binding.

Against

  • More employees may choose to pursue arbitration on a pro se basis.
  • Many states require mutuality of the right to arbitrate. This means that employers may not be able to fully carve out claims for injunctive relief for violations of trade secrets, restrictive covenants, non-compete clauses, or other instances when they may wish to resort to a court instead of arbitration.
  • Very important - Arbitration proceedings are less likely to be decided by a dispositive motion than are court proceedings.
  • An arbitration policy generally will be ineffective and unenforceable with regard to the filing of claims and charges before administrative agencies, and cannot prevent the United States Department of Labor, the Equal Employment Opportunity Commission, or similar agencies from bringing suit, including class and collective actions.

Additional Considerations

In addition to the foregoing considerations, prior to implementing a mandatory arbitration policy, an employer must consider the fairness of that policy and its enforceability in the various venues where it does business. An arbitration agreement must clearly specify what claims are covered, the time allowed to assert a claim, and the process to be followed to resolve a claim. The agreement should also:

  • Provide for the selection of a neutral arbitrator.
  • Provide for reasonable and meaningful discovery.
  • Be signed by both employer and employee.
  • Acknowledge availability and standards of a summary judgment procedure;
  • Contain class/collective action waivers.
  • Include a Savings Clause – The inclusion of a severability provision should be considered to save enforceability of a mandatory arbitration provision should a review in court find that any portion thereof is unenforceable.
  • Contain a Delegation Clause – Provide for the arbitrator and not a court to decide whether the arbitration agreement covers a particular dispute or is otherwise enforceable.

Arbitration will not alleviate an employee’s right to file administrative claims such as:

  • The right to file a charge before a governmental agency such as the EEOC, NLRB, or DOL.
  • The right to file a worker’s compensation claim.
  • The right to file an unemployment compensation claim.

Cautions:

  • The importance of a stand-alone agreement cannot be overemphasized. Rather than simply including it as just one more policy in a handbook, the arbitration agreement should be presented to the employee separately, requiring a directive to review and approve prior to signature. It doesn’t hurt to advise the employee that he/she may seek legal counsel before signing.
  • Some states do not consider the offer of continuing employment to be sufficient consideration of consent. When possible and to protect the notion of mutual consent, agreements should be presented upon an initial offer of employment and upon re-employment.

In light of the recent decision by the Supreme Court in Epic Systems, all employers - and especially employers with over 100 employees - should consider mandatory employee arbitration.