Forced Arbitration Agreements

The new threat to workers’ rights

Genevieve Carlton, Ph.D

The Civil Rights Act of 1964 protects employees from racial discrimination on the job. The Equal Pay Act of 1963 means employers can’t pay women less than men. And under the Whistleblower Protection Act of 1989, if a federal employee speaks out about illegal government activity, they can’t be fired.

But all of these critical protections evaporate under forced arbitration agreements.

What is Forced Arbitration?

Arbitration is an alternative method to the courts to resolve disputes. Both parties present their complaints to an arbiter, who decides how to settle the matter. While arbitration can help resolve problems quickly, the process can be exploited. When a single employee initiates arbitration against a large corporation, both sides are not equal. And many companies now rely on forced arbitration clauses, making arbitration mandatory to resolve disputes. Simply by signing an employment contract, workers may be signing away their right to sue publicly in court for serious violations like discrimination and sexual harassment.

Most people don’t read the fine print closely, especially when signing an employment contract for a job offer. And more and more employers are using forced arbitration agreements to protect corporations at the expense of workers. Under these agreements, a man who was fired for his religious beliefs or a woman who’s boss sexually harassed her may not be able to sue their employer. Instead, they must pursue the claim through arbitration, and research shows the process overwhelmingly favors employers.  

According to the Economic Policy Institute, 60 million American workers are subject to mandatory arbitration procedures. Nearly 54% of nonunion private sector employers include mandatory arbitration in their contracts, and the number is even higher for larger companies, with 65% of companies with more than a thousand employees using arbitration. In New York state, 55% of employers use mandatory arbitration agreements. And the situation is likely to get worse in the future thanks to a recent Supreme Court ruling.

The Supreme Court and Forced Arbitration Agreements

The Supreme Court played a major role in the rise of forced arbitration agreements. Starting with a decision in 1991, the Supreme Court has consistently favored the rights of corporations to use mandatory arbitration agreements with employees. In 1991, a stock broker who registered with the New York Stock Exchange sued his employer for age discrimination after he was fired. The Supreme Court ruled in Gilmer v. Interstate/Johnson Lane that the arbitration clause in the employee’s NYSE registration meant that he could not sue for wrongful termination. The crucial decision meant that mandatory arbitration agreements superseded federal protections like the Age Discrimination in Employment Act.

In the decade after the Gilmer decision, mandatory arbitration agreements increased drastically, from 2 percent in 1992 to nearly 25 percent in the early 2000s. Since 2010, the Supreme Court has expanded its interpretation of arbitration protections, and in rulings from 2011 and 2013, the Court decided that arbitration agreements could also ban class action lawsuits.

Forced Arbitration Agreements and Class Action Lawsuits

Class action lawsuits protect the rights of employees who have all been mistreated by their employer. Take, for example, a group of workers who all realize their employer has been denying overtime pay, a form of wage theft. Normally, those workers could file a lawsuit together, under the representation of a single lawyer, to recover their lost wages. But forced arbitration agreements are changing that.

The Supreme Court ruled that mandatory arbitration agreements can include class action waivers in AT&T Mobility LLC v. Concepcion (2011) and American Express Co. v. Italian Colors Restaurant (2013). Employers responded by using the decision to ban their employees from bringing or participating in class actions.

Over 30 percent of companies that use arbitration agreements also ban class action suits. Instead of working together to recover lost wages, each employee must enter arbitration individually. And in many cases, arbitration clauses discourage employees from entering the process. As the North Carolina Consumers Council reports, workers may have to pay fees of $750 or higher just to initiate arbitration. Sometimes, employees pay out of pocket to travel thousands of miles for arbitration, and they may have to pay the arbitrator’s hourly fee, which can easily exceed $300 an hour.

These high expenses discourage workers from entering into arbitration, and combined with the prohibition on class action suits, employers are much less likely to ever recover lost wages or get damages for discrimination or sexual harassment.

Arbitration versus Forced Arbitration Agreements

Arbitration has its benefits in some situations. However, the element of coercion in forced arbitration agreements makes them dangerously unfair to workers. Arbitration only works if both parties fairly agree to the process, which isn’t the case with forced arbitration agreements.

Take, for example, an employment contract that contains an arbitration clause. When the employer offers the job, the new hire must choose between signing the arbitration clause or losing the job. Other companies may require current employees to sign a new arbitration agreement to keep their jobs. Similarly, Lowe’s reportedly required managers to sign a forced arbitration agreement before they could receive bonuses.

Supreme Court decisions since 1991 have encouraged employers to use forced arbitration agreements. (photo by Matt Wade)

These agreements are not voluntary––if employees or new hires refuse to sign, they lose their jobs or miss out on valuable bonuses. And the problem is likely to get worse after the May 2018 Supreme Court ruling in Epic Systems Corp. v. Lewis. In the case, the Supreme Court held that a group of employees paid less than the federal minimum wage or denied overtime could not file a class action against their employer. The majority opinion held that employers can enforce arbitration clauses even when the amount owed to each employee is small. In practice, that means workers are less like to recover lost wages.

The Supreme Court rulings since 1991 have ignored a critical factor in the relationship between employees and employers: it is not an equal relationship. Employers benefit from their size, their greater resources, and in most cases, teams of lawyers on staff. Justice Ruth Ginsburg recognized this in her dissent from the Epic Systems decision. “Employees’ rights to band together to meet their employers’ superior strength would be worth precious little if employers could condition employment on workers signing away those rights.” Or, in other words, employees cannot voluntarily enter a forced arbitration agreement with the threat of losing their job.

The Future of Forced Arbitration Agreements

Based on the Supreme Court’s track record and the response of employers, forced arbitration agreements are certain to increase in the future. So what can employees do about forced arbitration agreements? Most workers don’t have the luxury of turning down a job or a bonus to avoid an arbitration clause. On the federal level, Congress could ban forced arbitration agreements. At the state level, the governors of all 50 states signed a letter to ban forced arbitration in workplace sexual harassment cases. States cannot ban individual arbitration agreements because of the Federal Arbitration Act of 1925. They can, however, enact other enforcement statutes that are not based on class action but provide the essentially the same relief.

But until the government takes action, forced arbitration agreements are here to stay.