Supreme Court Weighs in On Arbitration Clauses in Employment Contracts

 

On May 21, 2018, the Supreme Court issued an opinion regarding arbitration clauses in employment agreements. Many business attorneys have been following the case, as it has the potential for far reaching impact on enforcement of employment laws and employment contracts.

The question presented to the Court was whether arbitration provisions in employment agreements that require employees to waive the right to participate in class action arbitration will be enforced, or whether employees should always be able to participate in class actions regardless of what they’re employment agreement says.

In a 5 to 4 ruling, the Court ultimately determined that clauses in employment contracts that require one-on-one arbitration are enforceable. The majority relied on the Federal Arbitration Act’s liberal policy of favoring arbitration agreements, as well as the Act’s basic rule that arbitration agreements will be enforced according to their terms, unless basic contract defenses for revocation of any contract apply.

Typically, someone might seek to avoid an arbitration clause and pursue a dispute in court by claiming that the contract itself was procured by fraud or duress, or that the contract is both procedurally and substantively unconscionable. For example, someone may assert that a contract is substantively unconscionable if it severely limits or waives essential rights, and procedurally unconscionable if the person had no bargaining power or choice in agreeing to the terms. However, the employees did not argue this point. Rather, the employees argued that the National Labor Relations Act, which requires that employees be permitted to engage in “concerted activities” for the purpose of “mutual aid and protection,” renders the class participation and collective action waivers illegal.

The majority was not convinced by this argument. They explain: the rule permits courts to invalidate agreements to arbitrate only when there are defenses that apply to “any” contract, but offers no refuge for defenses that apply only to arbitration. Gorsuch writes: “This is where the employees’ argument stumbles. They don’t suggest that their arbitration agreements were extracted, say, by an act of fraud or duress or in some other unconscionable way that would render any contract unenforceable. Instead, they object to their agreements precisely because they require individualized arbitration proceedings instead of class or collective ones. And by attacking (only) the individualized nature of the arbitration proceedings, the employees’ argument seeks to interfere with one of arbitration’s fundamental attributes.”

The decision is being widely criticized from a policy perspective as overly favoring employers, and ultimately upholding agreements that force employees to go it alone if they want to challenge employment violations. Writing for the dissent, Justice Ruth Bader Ginsburg raises her concern that requiring individual arbitrations would be prohibitively expensive for the employees, and “the risks of employer retaliation would likely dissuade most workers from seeking redress alone.”

Congress enacted the Federal Arbitration Act and the baseline rule favoring enforcement of arbitration clauses because the legislature considered arbitration to be a speedy, simple and cost effective alternative to litigation in court. However, the reality is arbitration is far from simple, entails complex rules and procedures, and can often be more expensive that litigation in court. As Ruth Bader Ginsberg noted in her dissent, an Ernst & Young Employee would likely have to pay $200,000 in expenses related to her claim in order to recover $1,867.02 in overtime pay and an equivalent amount as liquidated damages. On the other hand, most employee protection laws carry attorney’s fees provisions, in addition to double damages as liquidated damages.

Now that this decision has been rendered, I would expect that many more employment agreements will contain similar arbitration clauses. If you are an employee who is being asked to sign an employment agreement, you have to be extra careful about what you agree to. You do not have to agree to arbitrate, but if you do, that agreement will very likely be enforced. If you are an employer, this may be a good time to take a look at your employments agreements and consider whether it may be worth it to add or alter your dispute resolution provisions, keeping in mind the potential implications that an arbitration provision may have for enforcement of non-compete, non-solicitation and confidentiality provisions.

The text of the Supreme Court opinion can be found here: https://www.supremecourt.gov/opinions/17pdf/16-285_q8l1.pdf