More companies are stemming the rising tide of lawsuits by requiring their employees to sign arbitration agreements and barring them from joining class-action complaints.
According to a survey conducted by the employment law firm of Carlton Fields Jorden Burt LLP, the percentage of companies that use arbitration agreements to bar employees from participating in class-action lawsuits jumped to 43% in 2014 from just 16% in 2012.
During the same period, according to a report in the Wall Street Journal, there was a significant decline in lawsuits that accuse companies of wage theft, discrimination and other labor law violations.
While a U.S. Supreme Court decision in 2012 that upheld the use of arbitration agreements is cited as the main cause of the trend, a decision by the California Supreme Court in 2014 is likely to accelerate the use of arbitration agreements in employment matters.
In the 2014 case, a 6–1 majority in California’s highest court affirmed a Court of Appeal decision that class-action waivers in employee arbitration agreements are enforceable because of the U.S. Supreme Court precedent.
Before the Supreme Court’s ruling, most companies didn’t require employees to waive their right to join a class action because lower courts typically threw such agreements out. But the tide has changed.
The percentage of class-action lawsuits that address employment issues fell to 23% in 2014 from 28% in 2011, according to the Carlton Fields survey. Class-action suits from workers cost employers $463 million in 2014, down from $599 million in 2011.
Benefits of arbitration agreements (according to the law firm of Drinker Biddle) include:
- Potential reduction of litigation and the chances of large monetary settlements.
- Arbitration takes considerably less time than litigation in resolving disputes.
- Employers win more often in arbitration than litigation. A 2011 Cornell University study found that arbitrations favor employers more often than litigation does, and result in lower awards for employees.
- Lower insurance premiums.
- Confidential dispute resolution.
- Arbitration agreements with class-action waivers can help to eliminate private employment class actions.
Potential risk and downsides to arbitration agreements for employers (according to Drinker Biddle) include:
- Potentially more expensive, because arbitrators may be less likely to grant dispositive relief and arbitrators are often paid by the hour or day.
- Arbitrators may be more likely to “split the baby” or compromise.
- Arbitrators may be less likely to accept procedural defenses.
- Arbitrators may be more likely to allow hearsay and irrelevant witnesses than judges.
- AT&T Mobility vs. Concepcion – This 2011 Supreme Court decision gave employers confidence that courts would uphold class-action waivers, even though the case did not concern an employment matter. In this case, customers tried to sue AT&T over a sales-tax issue, but the court ruled that they had forfeited the right when they signed their service contract.
Since this decision, lower courts have extended the ruling to employment law cases.
- D.R. Horton, Inc. vs. NLRB In 2014, California’s Supreme Court affirmed a Court of Appeal decision that class-action waivers in employee arbitration agreements are enforceable because of the U.S. Supreme Court precedent. The court also rejected the National Labor Relations Board’s (NLRB) view that the National Labor Relations Act bars class-action waivers.
The NLRB agenda
Despite the fact that numerous courts have upheld the legality of arbitration clauses that preclude class actions, the NLRB continues to claim they contravene the National Labor Relations Act (NLRA).
Although the California Supreme Court has now joined many other courts in rejecting the NLRB’s decision in D.R. Horton that class-action waivers violate the NLRA, the board has continued to prosecute unfair labor practice charges against employers that have class-action waivers in their arbitration agreements.
Crafting enforceable agreements
If you are considering using arbitration agreements, Drinker Biddle recommends:
- Choosing a proper arbitral forum and set of procedures. Be mindful to include the following:
– A neutral arbitrator
– No limitation on remedies
– A means for adequate discovery
– Written arbitration awards
– Fees and costs will be born by the employer
- Specifying applicable rules
- Ensuring mutuality
- Excluding non-arbitral claims
- Including personal attorney general actions or representative claims (for California employers)
- To avoid accusations of unconscionability, arbitration agreements should not also create carve-outs or exceptions for claims that are likely to be brought only by one side or the other
- The California standard for arbitration agreements is that the agreement must have “a modicum of bilaterality”