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Time to give up on mandatory arbitration in employment disputes?

Aakanksha Bhardwaj[i]


As a corollary of the #MeToo movement in 2019, thousands of American employees started pressuring their companies to let them sue the employers in court for harassment at the workplace, as against mandatory arbitration clauses compelling them to waive those constitutional rights. Consequentially, a few companies, including Facebook and Airbnb, decided to limit the scope of these controversial clauses to exclude sexual harassment and assault claims. While the move is appreciable, it is not enough as employees continue to grapple with the issue on many other fronts.

In this article, the author analyses the practice of private resolution of disputes in America. She highlights how confidentiality in arbitration proves to be problematic in cases of sexual harassment, racial discrimination etc. She also compares America’s position with that of other jurisdictions.

Private Resolution of Disputes in the Context of Employment

Arbitration is a relatively quick, economical and confidential process, making it an attractive alternative for dispute resolution. However, confidentiality raises legitimate public-policy concerns about its suitability in some circumstances. Especially so in employment disputes where secrecy of proceedings implies sheltering companies from public censure due to exposure of their systematic wrongdoings against employees.

‘Mandatory employment arbitration clauses’ refers to the practice of businesses requiring employees to agree that all future disputes shall only be resolved through confidential arbitration. These clauses bar employees from suing their bosses in court for issues including racial discrimination, privacy protection, wage theft, etc. Moreover, there is considerable research to show that employees being at an unequal footing are less likely to win in this process. And even if they do, damages received tend to be dramatically lower than in court.

Against this backdrop, the compulsive clauses have been a contentious topic of discussions, especially in the US, where over 55% of the American workforce is governed by them (as of 2017; against 2% in 1992).

The Courtroom’s Perspective

The Federal Arbitration Act, 1925 (FAA) mandates courts to enforce pre-dispute arbitration agreements entered into by companies in the U.S. However, this has historically not applied to transactions between corporations and employees or consumers as Section 1 of the Act provides for exclusion of “contracts of employment”. The landscape changed abruptly in the 1980’s when Chief Justice Burger and other judges began to deliver speeches favouring alternative dispute resolution, eventually leading to a massive shift in the Court’s stance.

Now, mandatory employment arbitration clauses are prima facie enforceable, with Gilmer v Interstate/Johnson Lane (1991) and Circuit City Stores, Inc. v. Adams (2001) being crucial albeit shocking U.S. Supreme Court judgments in this regard. They upheld the enforceability of such clauses in the context of most employment contracts through an extremely narrow interpretation of the Section 1 exclusion. Permissible claims include those pertaining to age discrimination, illustrating that the “little guy” exception for the vulnerable can no longer be availed of by employees.

Businesses were only further incentivised to have such agreements after Epic Systems Corp. v Lewis (2018) not only upheld the validity of one-on-one mandatory arbitration agreements imposed by employers but also stated that clauses prohibiting class-action employee suits are legally permissible. This implies that the process has become more expensive and less efficient for individual employees. The court had further held that as per the “saving clause” under FAA, the only defences to invalidate such agreements would be traditional contract grounds such as fraud, duress, misrepresentation, etc.

Moreover, this private mechanism allows for lesser discovery and almost no possibility for appeals against decisions. And courts have oft-again stated that merely because the clauses are mentioned in fine print of form agreements does not reduce their legitimacy. As per the FAA, they don’t even need to be signed for being enforceable and therefore, sometimes companies only specify the recourse in employee handbooks, envelope stuffers, etc. As a judge had rightly opined, these encouraging trends have given corporations a “get out of jail free” card for all potential transgressions.

State legislatures have attempted to oppose the move through bills like AB51 in California, but the efforts can only yield minimal results in the absence of Congressmen’s action at the Centre. Self-regulation measures have also been taken by the American Arbitration Association and other organisations. They have issued the Employment Due Process Protocol to provide certain minimum standards of fairness to be observed in the proceedings. However, many companies are not a party to such protocols and mandatory arbitration clauses continue to be very much alive in the US.

The Critic’s Perspective and a Worldwide Comparison

The growing appetite for imposing mandatory clauses has had a devastating effect on the years of progress in the realm of safeguarding employee rights. In addition to the issues highlighted above, agreements containing such mandatory clauses, which employees are often unaware of, cannot be considered voluntary in any sense. Secondly, even under the “fairest” circumstances, companies are tempted to draft clauses to further deter employees from filing a dispute by shortening limitation periods, altering burden of proof requirements, etc. Thirdly, the neutrality of the arbitrators may be questionable as businesses tend to retain arbitrators from the same company, and this in turn may influence the tribunal’s findings to ensure loyalty of valued clients. Finally, due to a lack of public records, employees are unable to cite previous decisions for precedential purposes. Filing of separate, confidential cases for similar issues can lead to high inconsistency in their outcomes.

Compared to the US, the clauses are much less prevalent in other parts of the world. Belgium and Denmark only allow their use for the limited subset of managerial claims, and earning more than a stipulated amount is a qualifying threshold for that. This protects more vulnerable groups from coming under its purview and simultaneously affords higher confidentiality for managerial issues. Safeguarding the lower-level employees in this manner should also be a major concern from a policy perspective as infringement of their rights, violation of wage as well as hour laws is highly likely, and their limited education and poor financial resources does not further their case in arbitration any better. In Switzerland, employment law claims cannot be subject to arbitration for the duration of employment and one month thereafter. Arbitration is then permissible if both parties voluntarily agree. While no mandatory employment arbitration case has reached the European Court of Justice yet, the European Union (EU) finds it inherently unfair to bind employees like this and the usage of such clauses is unheard of. EU attorneys generally agree that it shall not be permissible under Article VI, European Convention on Human Rights, which entitles everyone to a fair and public hearing by an independent and impartial tribunal. Similarly, the practice is generally proscribed in other leading jurisdictions like Australia, China, India and Brazil. Many countries also have specialised courts and administrative tribunals to deal with employment-related issues.

Concluding Remarks

That USA’s position is unilateralist, and has been rejected worldwide, should itself be a reason for it to review its policy. Mandatory employment arbitration is unjust both because it is private and imposed by a single, stronger party. The most direct method of dealing with the situation would be for Congress to pass a bill prohibiting mandatory arbitration of employment or to provide for greater protection of their rights in the process. The Forced Arbitration Injustice Repeal Bill, 2019 was accordingly approved by the U.S. House of Representatives, but is likely to be rejected by the Senate. Unfortunately, another bill, titled the ‘Arbitration Fairness Act of 2018’, which prohibits pre-dispute arbitration agreements and offers choice at a later stage might be met with the same fate, given the present composition of the Congress. Changes in the government, post the 2020 American elections, will hopefully bring a ray of hope and this makes it exceedingly crucial for the parties concerned to continue lobbying vigorously for an increase in employee protections. Getting these bills passed would also go a long way in enabling the law-breaking employers to be held liable.

In the absence of such general actions, progress can still be made at more specific levels. The 2019 case of New Prime Inc. v. Oliveira, which ruled that contract of employment” in the FAA refers to any agreement to perform work, including Oliveira’s work as an independent contractor for truck-driving, is landmark in this respect for ruling in favour of the workers and rejecting decades of poorly-set precedents. Federal agencies including the Consumer Financial Protection Bureau, U.S. Department of Education and U.S. Department of Labor have heavily limited the scope of these clauses in the wake of abuses being faced by middle-class consumers, students and retiree staff. It is my hope that the Supreme Court and other specialised institutions will continue to take this restrained approach towards mandatory arbitration and the sentiment will be echoed in the caring and careful drafting of employee agreements by giant companies.


[[i]] Aakanksha Bhardwaj is a law graduate from NLU Delhi, currently working as an Associate at Cyril Amarchand Mangaldas. Her interests lie in Private Equity, Funds, Entrepreneurship, and Commercial Arbitration. For any discussion related to the article, she can be contacted via mail at Preferred Citation – Aakanksha Bhardwaj, Time to give up on mandatory arbitration in employment disputes?”, Arbitration & Corporate Law Review, Published on 7th November 2020.

Time to give up on mandatory arbitration
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This article is reviewed by Snehal Dhote and Kareena Sobti

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