Time to look at employee arbitration agreements

bruce sarchet
Bruce Sarchet

As business owners in the Central Valley are well aware, every time an employee is terminated from his or her job, there is a potential for a lawsuit.  With the explosion of class action lawsuits and “private attorney general” claims, the risks of employment litigation have never been higher.

Many employers use arbitration agreements to help to minimize some of these risks. This article will summarize the practical and legal issues that arise when such agreements are implemented in the workplace. However, as always, this article does not substitute for the advice of counsel.

An agreement to arbitrate employment-related claims can funnel potential future litigation to a neutral arbitrator, rather than to a judge and jury. Many employers believe that an arbitrator, who is in business for him/herself, will take a more even-handed approach to a claim of wrongful discharge or discrimination.

On the other hand, a jury, which typically is composed primarily of employees, may be more inclined to base decisions on emotion rather than legal principles.

Arbitration agreements may also include a class action waiver by which employees agree that all of their disputes with the employer will be resolved through individualized arbitration, rather than in a class or collective action or any other type of multi-plaintiff proceeding.

This obviously could provide a significant benefit to employers, as class action lawsuits have become more prevalent in recent years. That is especially true of lawsuits that allege technical violations of wage and hour laws. Such class action claims can result in significant costs for back wages, penalties and attorney’s’ fees.

Class action waivers have been enforced by courts when they are part of an arbitration agreement governed by the Federal Arbitration Act. That is the federal statute that mandates written agreements to arbitrate be enforced according to their terms like any other contract.  Indeed, in a commercial contract case (not an employment case), the U.S. Supreme Court upheld class action waiver provisions in arbitration agreements governed by the Federal Arbitration Act.

Employees have challenged the use of class action waivers in arbitration agreements.  In early 2012, the National Labor Relations Board determined that mandatory class action waiver provisions violate the NLRA because they prevent employees from engaging in “protected concerted activities” with other employees to improve the terms and conditions of their employment (D.R. Horton, Inc., 357 NLRB No. 184 (2012)).

As discussed previously in my column in the January 2015 issue, the NLRA generally applies to non-supervisory employees, even those who work at non-unionized companies.

The NLRB’s decision was overturned by the U.S. Court of Appeals for the Fifth Circuit.  The court found that class action waiver provisions in mandatory, pre-dispute arbitration agreements governed by the Federal Arbitration Act are enforceable, notwithstanding the right employees have to engage in concerted activities under the NLRA.

However, the court also stated that an arbitration agreement cannot contain language that would lead employees to reasonably believe they were prohibited from filing a complaint with the NLRB.

The U.S. Court of Appeals for the Ninth Circuit, which covers California, has not expressly ruled on the question.  However, in May of this year, the U.S. Court of Appeals for the Seventh Circuit in Chicago sided with the NLRB and found that arbitration agreements, required as a condition of employment, that forbid class actions violate section 7 of the NLRA.

There is now a “split in the circuits,” meaning the question could be heading to the Supreme Court for review.

Employers who have arbitration agreements may wish to review them at this time, as the law in this area has been in flux for several years. Special attention should be paid to whether the agreement could be reasonably construed to limit the right of an employee to file a complaint with the NLRB.

Businesses that do not currently use employment arbitration may wish to consider implementing a plan. One key decision to be weighed is whether the agreement will apply to all employees or only to those hired in the future.

In summary, notwithstanding the practical and legal challenges presented by arbitration agreements in the workplace, such agreements remain a viable tool to help reduce the risks employees’ legal claims pose for employers.

Bruce Sarchet is an attorney with the firm of Littler Mendelson and represents employers in labor and employment law matters.  You can contact him at [email protected].



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