Can States Ban Mandatory Arbitration Agreements of Employment Disputes?

Arbitration: Arbitration is a process where both parties agree to resolve their dispute privately without litigating in the court system. Unlike a lawsuit filed in court, arbitration is not a public process, so documents filed in connection to the arbitration are not publicly available. Employers who are involved in a dispute with an employee often prefer arbitration because it can be faster and cheaper than litigation, and it is a non-public process. Non-public does not necessarily mean confidential because the employee may still disclose any of the facts or circumstances related to the claim being arbitrated, absent some confidentiality agreement. (Also important to note, many states are limiting the use of confidentiality agreements prohibiting disclosure of facts related to workplace discrimination.)

The Federal Arbitration Act: The Federal Arbitration Act (FAA) is a broad federal law that is friendly toward arbitration. In arbitration agreements governed by the FAA, almost all employment disputes can be subject to binding arbitration. Where an arbitration agreement specifies that the FAA governs, the FAA will typically preempt any state arbitration law. Time and again the Supreme Court has ruled that the FAA preempts state laws attempting to limit the use of arbitration.

Some States Are Limiting Mandatory Arbitration

In response to the #MeToo movement, and to protect the rights of claimants in discrimination cases, some states are now attempting to ban mandatory arbitration in employment disputes and are taking various approaches to get around the FAA, to varying degrees of success. States are taking two main approaches to limit the use of mandatory arbitration:

1. Banning mandatory arbitration of all employment discrimination cases
2. Banning mandatory arbitration of sexual harassment claims only

Seven states currently have limits on arbitration and we anticipate more states to follow suit.

• California: Employers cannot, as a condition of employment, require arbitration of claims alleging violations of the California Fair Employment and Housing Act or Labor Code. However, the law does not ban arbitration provisions as part of a post-dispute settlement agreement or negotiated severance agreement (meaning it is not a take-it-or-leave-it condition of employment). This law is currently paused while litigation continues in the Ninth Circuit Court of Appeals.
• Illinois: Employers cannot, as a unilateral condition of employment, require an employee to arbitrate harassment or discrimination claims based on any protected category. The law does allow negotiated arbitration agreements that are truly mutual, but the law sets strict requirements for meeting this exception. This law went into effect January 1, 2020 and is currently in effect. While no lawsuit has yet challenged the validity of the new law, stay tuned.
• New York: Employers cannot unilaterally require arbitration of any claim of discrimination. However, negotiated and mutually agreed-upon arbitration agreements are permitted. There is currently a split of authority over the validity of this law: three federal courts and two state courts in New York found the FAA preempted the law; one New York state court found no preemption. While this authority weighs heavily in favor of preemption, the issue is unsettled.
• Washington: Employers cannot require arbitration of any discrimination claim. In July 2019, a federal district court judge ruled the FAA preempted the Washington law.
• Maryland: Employers cannot require arbitration of sexual harassment claims.
• New Jersey: Employers cannot require arbitration of any discrimination claim. In March 2021, a federal judge ruled the FAA preempted the New Jersey law.
• Vermont: Employers cannot require arbitration of sexual harassment claims.

Best Practices

What should employers do with these state bans of mandatory arbitration while FAA preemption remains unsettled? This situation is especially tricky for companies that employ people in multiple states. Employers who have employees in the states mentioned above should think closely about the language in their agreements.

• Businesses should consider explicitly stating in their arbitration agreements that the FAA governs. Companies with employees that live in a state that limits arbitration should also consider including language that accounts for contradictory state law. One approach would be to include the following or similar language: “To the extent that [the state law] remains in effect and is not preempted by the FAA, the arbitration agreement doesn’t govern [the claims for which arbitration is prohibited under state law].”
• No matter where your employee is located, businesses should Include language in the arbitration provision that makes clear that the agreement does not prohibit filing a discrimination claim with a government agency or participating in an investigation of workplace wrongdoing.
• To ensure that an arbitration agreement is enforceable, employers should not include the arbitration policy merely in an employee handbook that the employer can change unilaterally. It should be in a binding contract that shows unambiguous acceptance by the employee. Employers should separate the arbitration agreement from the employee handbook in order to emphasize that it is a binding contract between employer and employee.

SixFifty Solutions

SixFifty can help! While our Employment Agreement tool has always given users the option of including an arbitration provision in an employment contract, our toolset now includes a stand-alone arbitration agreement. We are continuously monitoring this dynamic area of the law and updating our tools with changes in real time. Working with SixFifty is like having the best employment lawyer in the world by your side.

If you are ready to get started or have any questions, schedule a demo with SixFifty today!