Arbitration: The Changing Legal Landscape

June 27, 2018

Although arbitration in the United States dates back to the 18th century, with a recent Supreme Court decision and the explosion of sexual harassment claims, arbitration is currently among the prominent legal issues in the American workplace.

With the passage of the Federal Arbitration Act (“FAA”) in 1925, and the development of the National Labor Relations Act (“NLRA”), arbitration gained status as a popular alternative to litigation Following World War II, arbitration played a pivotal role in American labor relations. Over the past two decades, some employers have begun using “mandatory arbitration clauses,” which require employees to waive their rights to litigate disputes with their employers in court. Last month, the Supreme Court ruled that mandatory arbitration clauses which require employees to waive their right to class-action lawsuits are valid and enforceable.

Supreme Court Upholds Mandatory Arbitration

On May 21, 2018, the Supreme Court’s majority ruled that organizations can require employees to arbitrate disputes with the employer individually and waive their right to employment-related class-action lawsuits. In the Epic Systems Corp. v. Lewis decision, written by Justice Neil Gorsuch, the Court rejected the National Labor Relations Board’s position that class action waivers violate employees’ rights to collective steps for their “mutual aid and protection” that are guaranteed by the NLRA.

Mandatory arbitration clauses have become more common in employment agreements over the past couple decades. Many employers have begun using these clauses because they help reduce the organization’s legal exposure. Also, because arbitration is usually conducted privately and the results are confidential, mandatory arbitration has allowed employers to avoid unfavorable publicity that might arise from employee grievances.

In the Epic Systems decision, the Court concluded that the FAA instructs federal courts to enforce mandatory arbitration agreements according to the terms of the agreement. Justice Gorsuch wrote, “the policy may be debatable but the law is clear: Congress has instructed that arbitration agreements . . . must be enforced as written.”

New York State Bans Mandated Sexual Harassment Arbitration

In the post-Harvey Weinstein era, one area to watch in the wake of the Epic Systems decision is sexual harassment claims that are covered by mandatory arbitration agreements. In the State of New York, legislation has already been passed prohibiting mandatory arbitration for allegations of sexual harassment.

As of July 11, 2018, New York law will prohibit provisions that mandate arbitration for allegations of sexual harassment. All mandatory arbitration clauses in New York will be null and void with regard to sexual harassment claims. However, the Bill does not affect the enforceability of mandatory arbitration clauses to arbitrate any other type of claim.

In the wake of Epic Systems, New York employers will undoubtedly argue that the prohibition of sexual harassment arbitration is preempted by the FAA. This New York law prohibits the mandatory arbitration of sexual harassment claims, “[e]xcept where inconsistent with federal law.” With that exception, some experts are anticipating legal challenges to this portion of the law once it goes into effect.

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