A Time for Choosing

Vast changes in the law, at both the federal and state level, have made it even harder to get through the already dense thickets of employment arbitration. What do businesses need to know going forward?

Suited man holding up falling walls with gray and yellow backdrop

Brandon D. Saxon and Debra Ellwood Meppen

March 23, 2023 11:30 PM

ARBITRATION IN employment litigation has always, understandably, been a contentious process. Navigating and enforcing agreements has gotten increasingly complex due to changes in federal law and regulations, as well as at the state level around the country. Here’s an overview.

Limits on Arbitration Agreements

Before deciding whether to include an arbitration agreement in employees’ onboarding documents, businesses should be aware of their legal limitations.

Federal. In general employment disputes, arbitration agreements cannot be used to force arbitration of sexual harassment claims. Prior signed agreements, including class and collective actions, are not enforceable and have lost all validity since President Biden signed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 into law in March 2022.

Meanwhile, the Forced Arbitration Injustice Repeal Act of 2022 (FAIR) was passed in the House (for the second time) in February 2021 and is headed to the Senate. The FAIR Act would “prohibit a pre-dispute arbitration agreement from being enforceable if it requires arbitration of an employment, consumer, antitrust or civil rights dispute.” The bill is expected to meet resistance in the Senate, with a majority of Senators having previously evinced a favorable attitude toward employers.

In the states. In California, the ban on mandatory arbitration agreements stemming from 2019’s Assembly Bill 51 has, since 2020, been bandied back and forth. Most recently, the Ninth Circuit on February 15, 2023 blocked enforcement of AB 51, finding that it’s preempted by the Federal Arbitration Act. As such, for now AB 51 has been enjoined, and employers can continue to condition employment on execution of an arbitration agreement.

These pacts’ utility has expanded, too, following a ruling by the First District of the California Court of Appeal in January of 2023. In Iyere v. Wise Auto Group, the plaintiff’s “I do not recall signing” defense was deemed invalid upon the prediction of a handwritten signature on an arbitration agreement, giving employers greater ability to enforce them.

In New York, employers are not permitted to make arbitration of discrimination-related claims mandatory. In New Jersey, there is a law that makes pre-dispute arbitration agreements essentially unenforceable; that law has been challenged by an assortment of business groups and is pending in federal court.

In the Pacific Northwest, lawmakers amended Washington state law in 2018 to prohibit employers from requiring the waiver of an employee’s right to publicly pursue a covered claim under the Washington State Law Against Discrimination (See Wash. Rev. Code 49.44.085). In 16 Illinois jurisdictions, by contrast, “all civil cases filed in which the amount of monetary damages being sought falls within the program’s jurisdictional limit are subject to the arbitration process,” according to a statute in place to limit the number of cases that extend into civil court, encouraging closer management and quicker resolution.

The Current Status of California Arbitration

Expanding upon changes to California’s Private Attorneys General Act (PAGA) arbitration practices, a U.S. Supreme Court ruling in Viking River Cruises, Inc. v. Moriana (2022) provided additional protection by allowing an arbitration agreement to be used to waive representative PAGA claims, enabling employees to pursue individual claims through arbitration and preemptively limiting potential civil penalties. Once a worker’s individual claim under PAGA is compelled to arbitration, he or she will not be able to bring a representative claim under PAGA.

In Iyere v. Wise Auto Group, the plaintiff’s “I do not recall signing” defense was deemed invalid upon the prediction of a handwritten signature on an arbitration agreement, giving employers greater ability to enforce them."

The crux of the high court’s ruling is that signing an arbitration agreement will not alter the employee’s rights. The agreement merely shifts the forum in which a claim can be heard. Further protections against the broad reach of PAGA have been introduced in California, too: The California Fair Pay and Employer Accountability Act is a proposed ballot initiative that seeks to substantially limit a private plaintiff’s ability to prosecute PAGA claims and seeks to repeal the current process that allows for the filing of frivolous claims. Lawsuits filed under PAGA have increased more than 1,000% since 2004, and approximately 4,000 PAGA notices have been filed with the state’s Labor and Workforce Development Agency (LWDA) nearly every year since 2014. The act is set to face the ballot in November 2024; if it passes, the mechanisms of PAGA would significantly reduce the private right of action and limit the breadth of PAGA claims.

Benefits and Costs

Arbitration agreements provide considerable protections—and come with some drawbacks as well. First, the benefits.

Time, speed and cost efficiency. Many find arbitration more time- and cost-effective than litigation. While the arbitrator’s fees must be taken into effect, litigation costs are typically much lower due to limited time (speed in) litigating, limited motion filing, limited discovery and limited time in proceedings.

Privacy and flexibility. In arbitration, the particulars of the dispute are not a matter of public record. The speed with which arbitration proceeds is due to its inherent flexibility. It moves forward based on the availability of all involved parties and a mediator, as opposed to the long, drawn-out schedule that’s a hallmark of a civil court.

Impartiality. All parties are involved in the selection of an arbitrator to ensure impartiality throughout the process.

“What’s done is done.” Unlike in a civil court dispute, in binding arbitration the ability to appeal is severely curtailed once a decision has been reached. The finality of an arbitration agreement, in tandem with the privacy the agreement provides, enables the employer to place the dispute firmly in the past, secure in the knowledge that there is no option to appeal it.

Despite these benefits, arbitration agreements have some drawbacks as well.

Perceived “fairness.” Should you select an arbitrator who ends up revealing an undetected bias, you risk diluting the neutrality of the process. In addition, its fairness could be questioned if arbitration is mandated by the contract. Because arbitration is confidential, some procedural transparency may be lost—and, worse, opposing counsel might not share with you certain evidence presented to the arbitrator.

Unpredictability. Arbitration can vary from the traditional approach seen in civil court. There may be instances when evidence considered in court is ignored during arbitration, and vice-versa. This nontraditional route may therefore result in nontraditional or unpredictable results.

“What’s done is done.” The finality of arbitration, while a benefit, also has the potential to be a detriment. You cannot appeal an unfavorable resolution.

Best Practices

Arbitration remains generally favored by courts and serves as an excellent option for employers. Having an enforceable agreement in place is the necessary first step. From there, while working with trusted counsel, employers should evaluate the specifics of each matter case by case to assess cost, risk and the organization’s goals and overall strategy to determine whether arbitration is the right choice. Please don’t hesitate to contact the authors for further guidance and recommendations.

Brandon Saxon is a partner and serves as Co-Chair of the National Employment practice group at Gordon Rees Scully Mansukhani LLP. His practice focuses on a wide range of civil litigation matters focusing on the defense of companies and employers in employment and commercial related actions. He has litigated a number of matters to successful resolution in both state and federal courts and has experience in a variety of heavily regulated practice areas.

Debra Ellwood Meppen is a litigation partner and the Gordon Rees Scully Mansukhani National Labor and Employment Law Practice Group Chair. She is a highly sought-after attorney for her expertise, negotiation abilities and discretion that she offers to celebrity, corporate and other clientele. She also leads the firm’s Women’s Initiative, developed to support and encourage female attorneys on leadership and professional growth.

Headline Image: iStock/ SvetaZi

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