What is the nature of arbitration agreements?

In theory, arbitration agreements are consensual and treated as contracts. “Consensual” means both parties must demonstrably consent. It is sound practice to ensure the employee acknowledges the knowing and voluntary nature of arbitration provisions. Generally, courts enforce contractual arbitration provisions when both sides are said to have received something in exchange for agreeing to arbitrate in lieu of a “day in court.” As a result, it is sound practice for contracts with arbitration clauses to acknowledge explicitly that the parties are relinquishing access to the judicial system.

Many times, an applicant agrees to arbitrate employment-related disputes at the time of applying for employment, and the job offer is deemed the legal consideration for the applicant’s agreement to arbitrate a dispute that may arise later.

Why do courts and employers favor arbitration?

Courts favor this outcome, in part, because enforcing arbitration clauses channels work away from already overcrowded federal and state court dockets. Employers also favor arbitration as the proceeding could be faster and less expensive than litigating in court. There is generally greater flexibility in scheduling the proceedings to accommodate the parties’ schedules. Further, an arbitration proceeding is private, typically confidential, and the employer’s name will not be cited in a public filing (in contrast to a Complaint filed in court) and is less likely to be reported in the media. An arbitration proceeding is before an experienced arbitrator (or panel of arbitrators) who generally will be an experienced attorney and avoid trial before a judge or a jury. Thus, proponents say arbitration enhances individual freedom by allowing parties to resolve disputes in a more efficient manner and without government involvement.

What is the Federal Arbitration Act?

Courts generally rely on the Federal Arbitration Act to enforce contracts between employers and employees that require arbitration. However, “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce” are exempt from the Federal Arbitration Act. In April 2024, the Supreme Court unanimously decided that this language should be interpreted to exempt individuals who play a “direct and necessary role” in the free flow of goods across borders. That is, is the worker engaged in interstate commerce, without regard to the nature of the business of their employers?

In Bissonnette v LePage Bakeries, 601 US 246 (2024), Mr. Bissonette, an independent contractor delivered baked goods to retail stores in a state in his purchased territory. His contract included an arbitration clause. When a dispute arose between Mr. Bissonnette and the bakery, the bakery sought arbitration. The U.S. Supreme Court decided that Mr. Bissonnette’s work governed whether the statute’s limitation applied. The Court ruled that the fact that his contract was with a bakery was irrelevant. The appropriate question was whether Mr. Bissonnette was moving goods in interstate commerce.  Subsequently, courts have reached decisions against enforcing arbitration favoring a “last-mile” Amazon delivery driver, various warehouse workers, and a technician who filled the jet fuel tanks on transport aircraft.

As a result, employers may have arbitration clauses in their employment-related documents that may not apply to some group of workers that facilitate moving physical goods from place to place.

What are the potential drawbacks to arbitration for employers to consider?

Employers should consider the cost of arbitration. It is typically the employer’s obligation to pay the arbitrator’s full fee. If the employer is insured for the dispute, the insurance company may (or may not) pay the arbitrator’s fee. Also, there is a limited right of appeal to challenge the arbitrator’s findings and rulings, unlike if the matter were litigated in court.

What is the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act?

In the aftermath of the “Me, Too” movement, the requirement to arbitrate claims of alleged sexual assault and sexual harassment, that accrued on or after March 3, 2022, is precluded by the federal Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (“EFAA”) (9 U.S.C.§§ 401 & 402) if the arbitration clause was signed by the parties before the asserted sexual assault or sexual harassment. The EFAA amends the Federal Arbitration Act to specify that victims of sexual assault or harassment can pursue claims in court and on a class-wide basis, even if they signed a pre-dispute arbitration agreement. In at least one decision, the employer’s alleged bad behavior occurred prior to the enactment of EFAA but the “hostile work environment” claims persisted after the enactment date. The Second Circuit applied EFAA and invalidated the employee’s existing arbitration agreement that would have otherwise governed. Olivieri v. Stifel, 112 F.4th 74 (2d Cir. 2024). However, in cases where the alleged sexual assault or sexual harassment occurred before EFAA became effective, courts have ruled that EFAA does not apply, and the claims were to be arbitrated.

Employers that have implemented arbitration clauses in employment-related documents are encouraged to consult with legal counsel to ensure compliance with EFAA.

What steps can employers take to ensure compliance with employment agreements and arbitration clauses?

To reduce the risk of legal disputes, employers should take several key steps. First, they must ensure that all employment agreements and arbitration clauses are clear and consensual, with employees acknowledging their understanding and consent. Regularly reviewing and updating these agreements to comply with current laws is essential. Finally, seeking legal advice to ensure the enforceability of the arbitration clause can help employers maintain compliance and reduce the risk of legal disputes.