If an employer wants to limit the risk of being forced to defend an employee class action, entering into individual arbitration agreements with employees is now a strategic option. In a series of recent decisions, the U.S. Supreme Court has stated emphatically that the Federal Arbitration Act (FAA), which applies to most employment relationships, not only favors arbitration over litigation, but also allows the parties to enforce the terms of an arbitration agreement that limits or excludes the use of the class action procedure. Although attorneys representing employees, some state court judges, and some government agencies continue to look for ways around the Supreme Court rulings, the strong likelihood is that employment arbitration agreements limiting or excluding the use of class action procedures will nonetheless be enforced in most instances.
Even as some state court judges search for ways to avoid or defy the U.S. Supreme Court rulings on the preemptive effect of the FAA with regard to arbitrations, the majority of courts appear to be following the rulings faithfully.
Be aware, however, that the U.S. Supreme Court decisions have not addressed squarely so-called “procedural unconscionability.” This refers to state law policies related to the circumstances under which the arbitration agreement was entered into as well as arbitration requirements that purport to place procedural burdens on the employee such as bringing the arbitration in a location far away from the employee’s place of work or residence, placing an unusually short statute of limitations on the employee, or placing significant cost burdens on the employee for the administrative costs of the arbitration or attorney fees of the prevailing party. Employers should realize that in preparing and implementing employment arbitration agreements, they must be careful not to run afoul of state public-policy procedural rights and obligations.