Employer-Forced Arbitration: Legal Violation Or Not?

Mandatory arbitration in the workplace is a growing trend, with over 60 million workers now subject to it. This means that employees must resolve legal claims with their employers through arbitration, rather than in court. While arbitration can be mutually beneficial, allowing for efficient and private resolution of claims, it also has dire consequences for workers. It prevents employees from suing for violations of important employment laws, such as minimum wage and overtime pay, privacy protection, and protections against discrimination. Additionally, it keeps workplace abuse out of the public eye and allows employers to continue violating the law. Although arbitration agreements must meet certain legal requirements to be enforceable, and workers can still report illegal conduct to the Labor Department, the rise of mandatory arbitration in the workplace is a concerning shift in the civil justice system.

Arbitration clauses in employment contracts

The Supreme Court has, in recent decades, enabled large corporations to force employees into arbitration for practically all types of alleged violations of state and federal laws. This includes violations of laws designed to protect citizens against consumer fraud, unsafe products, employment discrimination, nonpayment of wages, and other forms of corporate wrongdoing. By including arbitration clauses in their contracts, corporations can write the rules that govern their relationships with their workers and design the procedures for interpreting and applying these rules.

The inclusion of arbitration clauses in employment contracts has several implications for employees. Firstly, it limits employees' access to the courts and their ability to vindicate their rights in a judicial setting. Employees subject to mandatory arbitration can no longer sue for violations of important employment laws, including rights to minimum wages and overtime pay, rest breaks, protections against discrimination and unjust dismissal, privacy protection, and family leave, among others. Secondly, arbitration clauses often include class-action waivers, preventing workers from litigating their cases jointly. This means that workers with relatively small individual claims must bear the high cost of pursuing these claims alone, which most low-wage workers cannot afford. As a result, very few workers with employment claims subject to mandatory arbitration end up bringing these claims to an arbitrator. Thirdly, arbitration awards are private and not published, keeping workplace abuse out of the public eye and allowing companies to continue violating the law without public scrutiny. Finally, arbitrators cannot award injunctive relief, meaning they cannot order employers to change their practices going forward.

Despite the prevalence of mandatory arbitration clauses, employees still have the right to report illegal conduct to the Labor Department and participate in their investigations or litigation. Additionally, courts have affirmed the independent authority of the Labor Department to recover unpaid wages and damages in court for employees who signed private arbitration agreements.

Arbitration awards are private

The privacy of arbitration awards is concerning because it keeps workplace abuse out of the public eye. It closes the courthouse doors and eliminates the power of juries or judges to stop and publicly rectify violations of workers' rights. Workers tend to recover much less when forced into arbitration than when they litigate their claims in court.

Furthermore, arbitrators cannot award injunctive relief, meaning they cannot order employers to change their practices going forward. As a result, illegal employer practices, such as independent contractor misclassification, can continue until a court rules them illegal.

While arbitration awards are private, it is important to note that some organizations, such as FINRA, provide online databases that allow users to search for arbitration awards. These databases demonstrate a commitment to transparency and enable users to research past arbitration awards.

Arbitration is costly for employees

Arbitration is often costly for employees, and this is a significant concern given that it is increasingly becoming a mandatory step in workplace dispute resolution.

Firstly, the cost of initiating an arbitration case is typically much higher than the cost of filing a lawsuit. For example, a consumer claim in the Circuit Court of Cook County, Illinois, would cost $221, whereas the National Arbitration Forum (NAF) would charge $11,625, a 5,260% difference. The American Arbitration Association (AAA) and Judicial Arbitration and Mediation Services (JAMS) would charge up to $6,650 and $7,950, respectively. These high fees upfront can be prohibitive for many individuals, especially when compared to attorney contingency fee arrangements, where plaintiffs can pursue cases without advancing funds.

Secondly, arbitration agreements often contain class-action waivers, preventing workers from litigating their cases jointly. This forces employees to pursue their relatively small individual claims through arbitration, which can be costly on an individual basis, especially when each employee's expected recovery is less than the cost of litigation. As a result, many workers cannot afford to bring their claims at all, and by one estimate, workers with mandatory arbitration bring 98% fewer claims under the Fair Labor Standards Act compared to those without it.

Additionally, arbitration awards tend to be much lower than jury verdicts, as arbitrators often favor companies that will provide them future business. This means that even if an employee wins their case, they may recover much less than they would have if they had litigated in court. Furthermore, arbitrators cannot order injunctive relief, meaning they cannot compel an employer to change their practices going forward. As a result, companies can continue violating the law as long as they pay the relatively minimal cost of individual arbitration awards.

The high cost of arbitration for employees has led to a situation where many victims of consumer fraud, employment discrimination, and malpractice are forced to drop their complaints or not pursue them at all. This effectively deprives workers of their rights and allows employers to continue breaking the law without facing meaningful consequences.

Arbitration agreements are unenforceable if unconscionable

Arbitration agreements are becoming increasingly common in the United States, with more and more employers requiring workers to sign them. These agreements often include class-action waivers, preventing workers from litigating their cases jointly and forcing them to pursue individual claims through arbitration. This has resulted in a significant decrease in the number of claims being brought forward, as many workers cannot afford the high costs associated with individual arbitration.

Despite the prevalence of arbitration agreements, they are not always enforceable. In some cases, courts have found arbitration agreements to be unconscionable and, therefore, unenforceable. Unconscionability refers to the absence of meaningful choice on the part of one of the parties, coupled with contract terms that are unreasonably favourable to the other party. In the context of arbitration agreements, unconscionability can be procedural, substantive, or both.

Procedural unconscionability arises from oppression or unfair surprise caused by unequal bargaining power. It may be proven by showing that a party had no meaningful opportunity to negotiate the terms of the contract or that the contract was presented on a "take-it-or-leave-it" basis. On the other hand, substantive unconscionability occurs when the contract terms are significantly oppressive or one-sided. For example, if an arbitration agreement limits the types of claims or remedies available to a party, or imposes undue burdens such as excessive arbitration fees, it may be considered substantively unconscionable.

Courts use a sliding scale approach when assessing unconscionability, weighing both procedural and substantive elements. The more substantively oppressive the contract terms are, the less evidence of procedural unconscionability is required for the agreement to be deemed unenforceable. However, even if an arbitration agreement is found to be unconscionable, courts have the discretion to either invalidate the entire agreement or sever only the specific provisions deemed unconscionable.

In summary, while arbitration agreements have become a common tool for employers to avoid lawsuits, they are not always enforceable. If an arbitration agreement is found to be unconscionable, either procedurally, substantively, or both, it may be deemed unenforceable by a court. This provides a potential avenue for workers to seek justice when faced with unfair or oppressive arbitration agreements imposed by their employers.

Arbitration agreements are banned in certain states

Seven states currently have limits on arbitration, with more expected to follow suit. These states include California, Washington, Maryland, New Jersey, and Vermont. California employers, for example, cannot require arbitration of claims alleging violations of the California Fair Employment and Housing Act or Labor Code. Similarly, in Washington, employers cannot require arbitration of any discrimination claim, and in Maryland, Vermont, and New Jersey, employers cannot mandate arbitration of sexual harassment claims.

The Federal Arbitration Act (FAA) has been a point of contention in the validity of these state laws, with some federal and state courts finding that it preempted state laws that attempted to ban arbitration agreements. However, the issue remains unsettled, and there have been instances where courts have affirmed their independent authority to recover unpaid wages and damages for employees who signed private arbitration agreements.

The rise in mandatory arbitration has been a concern for workers' rights advocates, as it can weaken workplace laws and allow employers to continue violating the law without public scrutiny. It also prevents workers from collectively litigating their cases, making it unaffordable for many to pursue their claims.

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