Faruqi Law Explains the Current Push to Eliminate Pre-Dispute Arbitration Contracts in the Workplace

By Staff Reporter Jun 15, 2021 08:11 PM EDT

In recent years, employers have often required employees to sign pre-dispute arbitration agreements as a condition of employment. President Biden and Congressional Democrats currently support new legislation that would overturn recent Supreme Court decisions that allowed employers to require employees to sign such agreements.

Faruqi & Faruqi LLP explains what a pre-dispute arbitration agreement is, how it can damage workers' rights, and how the federal government is currently looking into banning these agreements altogether.

Pre-Dispute Arbitration Agreements

Pre-dispute arbitration agreements require employees to arbitrate disputes against an employer which have not yet happened. Arbitration agreements are often put into play regarding issues like wage theft, sexual harassment, and overtime violations. Employees choose their own "independent" arbiter to decide on the case. This allows employers to act as the judge and jury in cases where they have been accused of wrongdoing.

Employers receive many benefits from these arbitration agreements. They will not be pulled into extensive court cases if there is a problem with an employee. They have a reduced time burden as well.

Employees can also benefit from these agreements, but they generally favor the employer. An employee could be spared the hassle, delays, and emotional distress associated with going to court over a dispute.

Legislative Efforts to Block Mandatory Arbitration

The Forced Arbitration Injustice Repeal Act (FAIR Act) was passed in the House in 2019. This act could ban mandatory, forced, or private arbitration clauses both in employment and consumer contracts.

Many workers and consumers have signed away their rights to sue, and sometimes they do not know that they have done so. The FAIR Act would allow employees to bring up court cases instead of allowing their employer to arbitrate the resolution. This legislation would significantly help those with less power in the workplace: people of color and women.

The most significant blow of the FAIR Act to employers would be the prohibition on agreements requiring employees to pursue their claims individually rather than as a class. Individual arbitration clauses are often used to prevent small-claim, high-stakes lawsuits, where the plaintiff's possible recovery is smaller than the cost of litigation. If the arbitration clause is enforced, a plaintiff will often have to abandon their suit. Under the FAIR Act, there would be no barriers to an employee seeking to file an individual claim against their employer.

Supreme Court Decisions

The Supreme Court's general rule on arbitration is that the court decides whether arbitration clauses cover the particular issue in dispute. The Court generally also requires that there be "clear and unmistakable evidence" that both parties agreed to arbitration in advance of the dispute.

During the 2018 term, the Supreme Court issued rulings in three cases that addressed the Federal Arbitration Act's questions.

Henry Schein, Inc. v. Archer and White Sales, Inc.

In the case of Henry Schein, Inc. v. Archer and White Sales, Inc., the Supreme Court reviewed a decision for the Fifth Circuit that permitted the court to decide on arbitrability questions, regardless of the parties' existing contractual agreement.

The Supreme Court overturned this decision, stating that the Federal Arbitration Act must be interpreted as written in the same way as contracts. The Court claimed that it was not at liberty to rewrite the law.

New Prime Inc. v. Oliveira

In New Prime Inc. v. Oliveira, the Court considered whether an exclusion in the FAA for workers engaged in foreign or interstate commerce could be assigned to an arbitrator. The Court also decided whether an independent contractor could be included in this exemption.

The Supreme Court found that a court could decide whether a company's agreement triggers the FAA. The Court also found that independent contractors can be included under these rules.

Lamps Plus, Inc. v. Varela

In Lamps Plus, Inc. v. Varela, the Court considered an arbitration agreement containing broad general language and decided whether these contracts authorize plaintiffs to commence class actions in arbitration.

Under the FAA, ambiguous agreements cannot provide a contractual basis for the conclusion that both parties agreed to submit to arbitration. The Court emphasized that arbitration is a matter of consent.

Understanding the Arbitration Situation

If mandatory arbitration clauses are abolished under the FAIR Act, employees will be free to sue their employers in court rather than go through a possibly biased arbitration process. Employees stand to benefit the most since employers will have to spend more to defend themselves and find themselves in conflict with the courts.

Discovering Your Rights

Employees with mandatory arbitration clauses in their contracts need to keep a close eye on the FAIR Act and whether the new Democratic administration passes it. Faruqi Law reminds employees of companies with mandatory arbitration clauses that they have rights under the law and that they may have recourse against their employers in court if they feel they have been wronged.

The FAIR Act and other legislation may reshape the work landscape and make it more difficult for employers to resolve their issues. Employers are also keeping watch on the FAIR Act to find out how they will preserve their interests.