New Supreme Court Ruling Affects Arbitration Agreements

People Processes

Legal analysis of alternative dispute resolution

What are the issues that arise when considering whether or not to offer alternative dispute resolution (ADR) to employees in the hope that they will use ADR in lieu of litigation? An employer wants to be sure this process will be:

• fair and objective;

• cost effective;

• capable of protecting the employer’s interests;

• reliable;

• binding on all parties; and

• a mechanism to provide closure.

Arbitration

Many employers are requiring, as a condition of employment, that applicants and employees give up their rights to pursue employment discrimination claims in court and agree to resolve disputes through binding arbitration. The agreements to arbitrate may be contained in an employment contract, employee handbook, or employment application. The use of such agreements can be found in various sectors of the workforce, including the securities industry, retail, restaurant and hotel chains, health care, broadcasting, and security services.

Enforceability. The enforceability of mandatory arbitration of statutorily protected employee rights, such as the right to be free of discrimination on the basis of race, color, religion, national origin, age or disability, has been debated. In two decisions by the U.S. Supreme Court, the controversy was essentially put to rest. In 1991, the Court ruled in Gilmer v. Interstate/Johnson Lane Corp. that a claim subject to the Age Discrimination in Employment Act could be subject to compulsory arbitration as required by an agreement ( ⁵). Then, in 2001, the Court ruled in Circuit City Stores, Inc. v. Adams that arbitration clauses in most contracts of employment (excluding employment contracts for transportation workers) are enforceable under the FAA ( ¹⁰). The rulings give employers broad authority to require employees to arbitrate employment disputes.

Agreements to arbitrate often contain two relevant provisions: one providing for arbitration of all disputes arising out of the employment relationship, and one giving the arbitrator exclusive authority to resolve the “gateway”question of enforceability (the delegation provision). Where an agreement to arbitrate includes a delegation provision, it is for the district court to consider a specific challenge to the enforceability of that particular agreement. But if a party challenges the enforceability of the agreement as a whole, the challenge is for the arbitrator. This is the result of a 2010 U.S. Supreme Court decision in Rent-A-Center, West, Inc. v. Antonio Jackson, where it was decided that where an agreement to arbitrate employment disputes gives the arbitrator exclusive authority to resolve the “gateway” question of enforceability, and where that party challenges specifically the enforceability of that particular agreement, the district court considers the challenge, but if a party challenges the enforceability of the agreement as a whole, the challenge is for the arbitrator to decide ( ¹⁵).

The Equal Employment Opportunity Commission (EEOC) has maintained a different position. It has strongly supported voluntary alternative dispute resolution programs entered into after a dispute arises. The EEOC has asserted that mandatory binding arbitration of discrimination claims as a condition of employment is contrary to the fundamental principles of employment discrimination laws.

Factors. Employees must have knowingly agreed to arbitrate employment discrimination claims before they can be forced to arbitrate those claims ( ²⁰). An employer argued that its employee’s Title VII sexual harassment charge should be subject only to arbitration. However, the arbitration agreement’s failure to describe which types of disputes were to be arbitrated prevented it from being a knowing agreement to arbitrate discrimination claims.

The Eighth Circuit Court of Appeals, in Patterson v. Tenet Healthcare, Inc., held that an arbitration clause in an employee handbook — which required employees to submit any claims arising out of their employment to arbitration — could be enforced against a Missouri employee, even though the rest of the handbook was not enforceable ( ²⁵).

Consideration. An arbitration agreement between job applicants and a third-party arbitration services provider that gave the arbitration firm complete discretion over arbitration rules and procedures, including the unlimited right to modify the rules at any time, without employee consent, was unenforceable. Having also retained complete discretion in choosing the arbitration forum, the firm’s promise to arbitrate was illusory; and the employees, therefore, did not receive consideration for their promise to submit disputes to arbitration. Accordingly, two employees were free to pursue Americans with Disabilities Act and Fair Labor Standards Act claims for unlawful termination ( ³⁰).

Voluntarily beginning arbitration. According to another case, an employee who voluntarily submitted a discrimination claim to arbitration was bound by the arbitrator’s decision ( ³⁵). The court held that a fired employee’s Title VII race discrimination suit was barred by his voluntary initiation of binding arbitration to resolve his challenge to his termination.

Even the fact that the employee had refused to sign the arbitration agreement did not prevent the arbitrator’s decision from being final. According to the court, the FAA’s writing requirement was satisfied both by an employer handbook establishing the grievance process the employee followed and by the employee’s written request to submit his grievance to final and binding arbitration.

Coercion or misconduct. Arbitration awards will not be upheld if there is corruption, fraud or other wrongdoing in the process. Thus it was unlawful for an employer, following the filing of discrimination charges with the Equal Employment Opportunity Commission, to require employees, upon penalty of termination, to sign statements of a mandatory policy to arbitrate ( ⁴⁰).

Class-action waivers. On January 13, 2017, the U.S. Supreme Court agreed to review whether class- and collective-action waivers in employment arbitration agreements violate the National Labor Relations Act (NLRA) and whether the Federal Arbitration Act (FAA) nonetheless trumps the NLRA. This resolved a split caused by contrary answers to those questions declared by the National Labor Relations Board (NLRB) and federal courts of appeals. The Court consolidated three cases — NLRB v. Murphy Oil, Ernst & Young, LLP v. Morris, and Epic Systems Corporation v. Lewis — for purposes of its review. In each of the three cases, an employer required, as a condition of employment, a contract providing for individualized arbitration proceedings to resolve employment disputes between the parties. However, each employee sought to litigate Fair Labor Standards Act (FLSA) and related state-law claims through class or collective actions in federal court.

On May 21, 2018, a divided U.S. Supreme Court held, in Epic Systems Corp. v. Lewis, that class- and collective-action waivers in arbitration agreements do not violate the NLRA ( ⁴⁵). The NLRA does not endow employees with the right to pursue class-action lawsuits, according to the High Court. The FAA strongly favors the arbitration of disputes, including employment-related disputes, and it instructs federal courts to enforce arbitration agreements according to their terms, including terms mandating individualized proceedings. Therefore, employers may compel employees, as a condition of employment, to agree to waive the right to file suit and to mandate arbitration instead — and to require that such arbitration proceed on an individual rather than a class-wide basis.

Encouragement of ADR

The EEOC announced in a policy statement that it is committed to the use of ADR in some cases where agreement between the parties is possible. ADR may not be appropriate in all cases in which the EEOC is involved; for example:

• where there is a need to establish policies or precedents;

• where resolution of the dispute would have a significant impact on non-parties;

• where a full public record is important; or

• where, because of the nature of the case, the agency must maintain continuing jurisdiction.

Fairness. For ADR proceedings to be “fair” in the eyes of the EEOC, they require at a minimum:

• voluntariness;

• neutrality;

• confidentiality; and

• enforceability ( ⁵⁰).

Where ADR is inappropriate. ADR is not a viable alternative to litigation in every instance. For example, in workers’ compensation claims, each state has established its own processes and rulings that, as a general rule, form the employee’s sole remedy.

Due process ensured. No matter what process and in what format, the courts demand due process and fairness in arbitration proceedings. Due process and fairness includes:

• proper and adequate notice to all parties clearly stating that all parties are to be governed by the process;

• proceedings where all parties have the right to present evidence and make arguments and have the right to rebut evidence presented by other parties and challenge the other parties’ arguments;

• a provision that the final decision is final and binding; and

• possibly other procedural requirements, based on each situation in context.

Additional encouragement to use ADR. Various federal laws have been written or amended to encourage ADR, including:

• The Civil Rights Act of 1991, amending Title VII of the Civil Rights Act of 1964;

• Section 1981 (Civil Rights Act of 1866);

• Attorney’s Fees Awards Act of 1976;

• Americans With Disabilities Act of 1990 (Section 513);

• Age Discrimination in Employment Act of 1967; and

• Family Medical Leave Act of 1993.

Footnotes

5 Gilmer v. Interstate/Johnson Lane Corp. (SCt 1991) 56 EPD ¶40,704. 10 Circuit City Stores, Inc. v. Adams (SCt 2001) 79 EPD ¶40,401. 15 Rent-A-Center, West, Inc. v. Antonio Jackson, (SCt 2010) 93 EPD ¶43,916. 20 Prudential Insurance Co. of America v. Lai (9thCir 1994) 65 EPD ¶43,365. 25 Patterson v. Tenet Healthcare, Inc. (8thCir 1997) 70 EPD ¶44,677.