Recently, Congress passed significant new legislation amending the Federal Arbitration Act and precluding employers from mandating that employees arbitrate sexual harassment or sexual assault claims. Importantly for employers, however, this new law does not impact employers’ ability to require arbitration of wage-hour claims, which, for most employers, is benefit of employment arbitration programs.
Mandatory arbitration agreements with class and collective action waivers play an important role in managing workplace disputes. As a condition of employment, the employee and the employer agree that any claims will be resolved in arbitration, which is the less formal and usually more expeditious than court. The Supreme Court has consistently supported the use of arbitration agreements in employment, and explicitly upheld employment-related class and collective waivers in its 2018 decision in Epic Systems Corp. v. Lewis.
Last week, Congress passed H.R. 4445, known as the “Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021.” The legislation, which is now awaiting President Biden’s signature, permits any person alleging sexual harassment or sexual abuse, at his or her election, to invalidate an arbitration agreement or class/collective action waiver that otherwise would require the harassment/abuse claim to be arbitrated.
The law is the culmination of years of scrutiny and criticism of arbitration, especially in light of the “Me Too” movement. Several states have passed laws either limiting the use of mandatory arbitration agreement in employment altogether (such as California), or limiting the arbitrability of certain harassment- and discrimination-type claims (such as New Jersey and New York). While these laws were vulnerable to preemption by the Federal Arbitration Act, H.R. 4445, an amendment to the FAA, may undermine or eliminate the preemption defense for such claims.
The good news for employers is that H.R. 4445 does not undermine the main reason that many companies find arbitration agreements useful: limiting potential class/collective action exposure from wage-hour claims. Because H.R. 4445 applies only to claims concerning sexual harassment or sexual assault, and does not apply to wage and hour claims, employers can continue to maintain (or roll out) mandatory arbitration programs that cover wage-hour claims, which are often asserted on a putative class/collective action basis. And employers can continue to include class and collective action waivers in their arbitration agreements for those claims.
Given these developments, now is a good time for employers to reconsider their arbitration programs, and the purposes behind those programs, to ensure that their arbitration policies continue to further the company’s objectives and comply with existing law. One possibility, for example, would be for employers to scale back mandatory arbitration programs to cover only wage-hour and similar claims with a high probability of class/collective action treatment. But such considerations should be made based on the nature of the employer’s business and the particular legal risks facing the company, and in consultation with all stakeholders, including the company’s attorneys. At the same time, employers should also continue to monitor developments at the federal and state level.
The bottom line: rumors of the death of employment arbitration have been greatly exaggerated. With respect to wage-hour claims—for many employers, the greatest hotbed of potential legal liability—arbitration agreements, including class/collective action waivers, remain alive and well.