Keith Mack
The Federal Arbitration Act (FAA) states that most arbitration agreements are valid and enforceable. However, Section 1 of the FAA provides an exception for transportation workers, including seamen, railroad employees, and other workers engaged in interstate commerce. While the FAA governs arbitration in many cases, state law can also play a significant role in determining the enforceability of arbitration agreements. In recent years, several states, including New York, Washington, Maryland, New Jersey, and Vermont, have passed legislation limiting mandatory workplace arbitration agreements, particularly in cases involving discrimination and sexual harassment claims. These state laws vary in their specifics, and there is ongoing legal debate over whether they are preempted by the FAA. As a result, businesses and employers should carefully consider both federal and state laws when drafting arbitration agreements and be explicit about the governing laws to ensure enforceability.
Can State Law Prevent Arbitration Agreements?
| Characteristics | Values |
|---|---|
| New York | Employers cannot unilaterally require arbitration of any claim of discrimination. However, negotiated and mutually agreed-upon arbitration agreements are permitted. |
| Washington | Employers cannot require arbitration of any discrimination claim. |
| Maryland | Employers cannot require arbitration of sexual harassment claims. |
| New Jersey | Employers cannot require arbitration of any discrimination claim. |
| Vermont | Employers cannot require arbitration of sexual harassment claims. |
| California | Prohibits employers from mandating arbitration agreements as a condition of employment for the most common types of employment law claims. |
| Illinois | Does not contain a transportation worker exception to its arbitration law. |
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What You'll Learn
State laws limiting arbitration agreements
State laws play a crucial role in limiting the negative consequences of forced arbitration, which has been a growing concern for employees and consumers. While federal laws have failed to restrict forced arbitration effectively, states have stepped up to protect their citizens' rights.
In recent years, several state legislatures have taken matters into their own hands by adopting legislation to restrict mandatory workplace arbitration agreements. Notably, New York enacted CPLR 7515 in 2018, voiding predispute agreements to arbitrate sexual harassment claims. The state later expanded this statute to encompass all discrimination claims. Similarly, states like Illinois, Washington, and New Jersey have passed laws prohibiting employers from mandating arbitration agreements for specific types of claims, including discrimination and sexual harassment.
California has also taken a stand against forced arbitration, passing Assembly Bill 51 (AB 51) in 2019, which prevents employers from making arbitration agreements a condition of employment for common employment law claims. Additionally, California state courts have prohibited waivers of representative PAGA claims in arbitration agreements, freeing employees from arbitrating individual PAGA claims.
However, the enforceability of these state laws is often challenged by federal laws, specifically the Federal Arbitration Act (FAA). Federal courts have occasionally ruled that the FAA preempts state laws on arbitration, creating a complex legal landscape. This dynamic area of law continues to evolve, with ongoing debates about the validity and scope of state laws limiting arbitration agreements.
To navigate this tricky situation, businesses employing people in multiple states should carefully craft their arbitration agreements. They should consider including language that acknowledges the potential contradiction between state laws and the FAA, stating that the arbitration agreement does not supersede state laws prohibiting certain types of arbitration.
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Federal Arbitration Act (FAA)
The Federal Arbitration Act (FAA) is a federal law that governs arbitration agreements. It provides that arbitration agreements are valid and enforceable, except for the same grounds that would apply to any other contractual provision, such as unconscionability or duress. This means that most state laws that seek to prevent the enforcement of arbitration agreements are preempted by the FAA.
However, it's important to note that not all state laws regarding arbitration are preempted by the FAA. For example, certain state laws that govern the procedures of arbitration without affecting its enforcement are outside the scope of the FAA. Additionally, in some cases, federal courts have ruled that specific state laws prohibiting mandatory arbitration in certain types of disputes are not preempted by the FAA.
The FAA establishes that once an award is made by an arbitrator or arbitration panel, it must be "confirmed" in a court of law. This confirmation process transforms the award into an enforceable judgment, which the winning party can enforce in court. The FAA also sets out specific time frames for confirming an award and challenging any objections.
The enforceability of arbitration agreements under the FAA has been a subject of debate, with some arguing that it unfairly favours employers in arbitration disputes. In response, the Forced Arbitration Injustice Repeal Act (FAIR Act) was introduced in Congress in 2019. The proposed bill aimed to modify the FAA by invalidating contracts that require forced arbitration, except under limited conditions. While the bill passed the House of Representatives, it did not succeed in the Senate during the 116th Congress.
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Transportation worker exception
The Federal Arbitration Act (FAA) requires courts to enforce arbitration agreements. However, the FAA does not apply to "contracts of employment" with certain workers, including seamen, railroad employees, and other workers engaged in foreign or interstate commerce. This is known as the "transportation worker exception" or exemption.
The transportation worker exception has been interpreted broadly by courts to include not only employees but also independent contractors. For example, in New Prime Inc. v. Oliveira, the U.S. Supreme Court held that the FAA could not be used to compel arbitration with an interstate truck driver who was an independent contractor.
The exception has also been applied to workers who are not directly involved in transportation. In Bissonnette v. LePage Bakeries, the U.S. Supreme Court clarified that a worker need not "work in the transportation industry" to fall within the exception. Instead, the Court held that "transportation workers" are "connected by what they do, not for whom they do it." This decision effectively expanded the scope of the exception, and it is likely that plaintiffs' lawyers will continue to test the boundaries of the exemption.
In light of these developments, companies that employ transportation workers should assess their arbitration programs and consider including an alternative state law enforcement provision. State law may provide a useful alternative mechanism for enforcing arbitration agreements with transportation workers. For example, in Byars, an arbitration provision was enforced against interstate truck drivers under Minnesota law, even though they were subject to the transportation worker exception under the FAA.
To ensure enforceability, companies should carefully draft their arbitration provisions to meet specific state law requirements. They should also consider including language that accounts for contradictory state law, such as by stating that the arbitration agreement does not govern claims for which arbitration is prohibited under state law.
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Workplace sexual misconduct disputes
In the past, mandatory arbitration agreements have been used to keep workplace sexual misconduct disputes confidential. However, in recent years, several states in America have adopted legislation to limit these agreements. For example, in 2018, New York enacted Section 7515 of the New York Civil Practice Law and Rules (CPLR 7515), voiding predispute agreements to arbitrate sexual harassment claims. The state of Washington also ruled that employers cannot require arbitration of any discrimination claim.
In 2022, the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (EFASASHA) was passed, which amended the Federal Arbitration Act to specify that victims of sexual assault or harassment can pursue claims in court, even if they are bound by a predispute arbitration agreement. This law applies to all agreements covered by the FAA, including many consumer claims and employment claims. It also means that employers cannot force employees to waive their rights to a class-action lawsuit related to sexual harassment.
Despite this federal legislation, companies with employees who live in states that limit arbitration should consider including language in their arbitration agreements that accounts for contradictory state law. For example, they could include the following: "To the extent that [the state law] remains in effect and is not preempted by the FAA, the arbitration agreement doesn't govern [the claims for which arbitration is prohibited under state law]."
In June 2022, the U.S. Supreme Court held that the FAA demands individual and representative claims be divisible, compelling plaintiffs to arbitrate their individual claims per their agreements. However, the Court also held that the plaintiffs' representative claims must be dismissed, reasoning that standing under PAGA requires an individual claim.
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State laws on arbitration clauses in employment agreements
In response to this criticism, several states have passed legislation to limit mandatory workplace arbitration agreements. For example, New York enacted Section 7515 of the New York Civil Practice Law and Rules (CPLR 7515) in 2018, voiding predispute agreements to arbitrate sexual harassment claims. The following year, New York expanded the statute to apply to all claims of discrimination. However, there is currently a split of authority over the validity of this law, with federal courts finding it preempted by the FAA and one state court finding no preemption.
Other states with similar legislation include Illinois, Washington, and New Jersey, which have passed laws prohibiting employers from requiring arbitration of discrimination claims. In 2019, California passed Assembly Bill 51 (AB 51), prohibiting employers from mandating arbitration agreements as a condition of employment for common employment law claims. California state courts have also prohibited waivers of representative PAGA claims in arbitration agreements, freeing employees from arbitrating individual PAGA claims. However, these state laws have been met with mixed results in courts, with some finding that they are preempted by the FAA.
To ensure enforceability, businesses should consider including language in their arbitration agreements that accounts for contradictory state law. For example, stating that "the arbitration agreement doesn't govern [the claims for which arbitration is prohibited under state law]" can help clarify the scope of the agreement. Additionally, employers should not include the arbitration policy merely in an employee handbook that the employer can change unilaterally. Instead, properly drafted arbitration provisions that provide a less expensive, efficient, and private dispute resolution mechanism can still be beneficial.
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Frequently asked questions
Yes, state law can prevent arbitration agreements. However, this depends on the state and the type of claim being made. For example, in New York, employers cannot unilaterally require arbitration for discrimination claims, but negotiated and mutually agreed-upon arbitration agreements are permitted.
The FAA provides that most arbitration agreements are valid and enforceable. However, Section 1 of the FAA provides an exception for transportation workers, including seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.
No, employers should consider applicable state law in addition to the FAA when moving to enforce arbitration agreements. Many states have their own arbitration statutes that permit the enforcement of such agreements, and some of these statutes do not contain a transportation worker exception.
Yes, states can limit arbitration agreements for employment disputes. For example, California passed Assembly Bill 51 (AB 51) in 2019, prohibiting employers from mandating arbitration agreements as a condition of employment for common employment law claims.
To ensure enforceability, employers should not include the arbitration policy merely in an employee handbook that the employer can change unilaterally. Instead, employers should consider including specific language in the arbitration provision that clarifies the agreement does not prohibit filing a discrimination claim with a government agency.
