Mandatory arbitration clauses in employment contracts have long been a topic of controversy. Private employers often include such provisions, and estimates suggest that around 60 million people in the United States have signed these clauses. California recently banned mandatory arbitration clauses in employment contracts. However, rather than going into effect on January 1, 2020, the law was blocked by a United States District Court.

California’s law is also not in line with the current thinking of the Equal Employment Opportunity Commission (EEOC). The EEOC recently reversed course and no longer opposes the practice of requiring mandatory binding arbitration agreements as a condition of employment. Although the EEOC’s stance is not binding on courts, it does frequently serve as guidance.

Such clauses are becoming more common in employment contracts as courts continue to rule in favor of binding arbitration.

Employers Unfairly Benefit from Arbitration Clauses, Opponents Argue

Binding arbitration clauses in employment agreements are frequently criticized for being unfair to the employee. In many cases, employees have little bargaining power regarding the terms of an employment contract. Those opposed to mandatory arbitration policies point out that when the rights of a worker are violated, which could occur in cases of sexual harassment or employment discrimination, the employee is forced into an arbitration proceeding and is not able to take the matter to court.

The #MeToo movement also highlighted the risks of mandatory arbitration policies. Employees subjected to sexual harassment in the workplace sometimes come forward to report the abuse only to learn that they forfeited their right to sue on the day they signed an employment contract.

The agreements often provide that the company has the right to choose an arbitrator or to create a list of arbitrators from which the employee can select. In either case, the employer may have a long-standing relationship with the arbitrator, and the arbitrator may have the financial incentive to side with the company to earn more business from the employer.

The company also benefits from the fact that arbitrations are frequently confidential. Arbitration rulings will not, therefore, result in bad press for the employer.

Agreements may also place limitations on the types of remedies available if the employee is successful in the arbitration proceeding. The agreement may not allow for punitive damages or injunctive relief and could cut the time allotted to bring a claim.

Such limitations can reduce the costs for the employer while limiting the employees’ incentives to take action in the event they are subjected to employment-related violations.

Those who argue in favor of arbitration policies claim that these agreements save time and money. Without the involvement of attorneys, the expenses may indeed be lower. The process is also less formal and, therefore, may proceed more quickly than would a lawsuit. Those who support mandatory arbitration contend that the employees also benefit from these clauses and the rapid, cost-effective, confidential handling of claims.

California’s Stalled Ban on Mandatory Arbitration

California enacted a law, introduced last year as AB 51, which would have made it illegal for companies to force binding arbitration into employment contracts. While the law would have gone into effect on January 1, 2020, the United States Chamber of Commerce filed a lawsuit against California stating that the law violates the Federal Arbitration Act (FAA). In response, a federal judge placed a preliminary injunction on the law, causing it to become unenforceable. Currently, employers are still able to use such clauses in the state.

California has appealed the decision to the Ninth Circuit. In a brief filed in support of its appeal, the state attempts to distinguish between “agreements,” which it concurs are regulated by the FAA, and “policy and practices,” which it claims are not.

Supreme Court Finds in Favor of Arbitration Clauses

In an unrelated 2018 decision, the Supreme Court found that courts must enforce arbitration clauses requiring individual litigation of employment disputes. The involved employees were seeking to litigate several state law claims in class actions in federal court. The employees had all signed arbitration clauses but argued that “saving clauses” in the contracts work to remove the arbitration requirements because they stand in the way of the National Labor Relations Act.

The 5-4 decision was written by Justice Neil Gorsuch and held that individual arbitration is enforceable, claiming that changes to such laws would be properly made through legislative efforts rather than in the courts.

Justice Ruth Bader Ginsburg dissented in the case, stating employees’ ability to “band together to meet their employers’ superior strength” is rendered worthless if the employee is required to sign that right away as a condition of their employment.

The Future of Arbitration Clauses

The injunction in the pending California case means that mandatory arbitration clauses can still be included in California employment contracts. The history in the Supreme Court’s handling of such cases also supports the continued use of such inclusions in employment contracts.

However, the pending appeal could lead to changes that would render such clauses illegal. Employers considering such policies in California are therefore left in a precarious position.

While many large companies do maintain mandatory arbitration policies, others, including Google, have voluntarily ceased the use of such provisions, often after pressure from their employees.