Is Your Arbitration Clause Enforceable?
Arbitration clauses in a contract require parties to resolve differences through an arbitration process- binding them to a resolution outside the courts. While the Federal Arbitration Act (FAA) has historically protected arbitration clauses, recent actions by the NLRB and EEOC have suggested that they are taking a more serious look at the legality of these clauses in employment contracts and handbooks.
The NLRB’s Stance
In 24 Hour Fitness USA, Inc. v. Alton J. Sanders (Case 20-CA-35419), the NLRB filed a complaint against California-based 24 Hour Fitness asserting the company forces employees to give up their rights to future class litigation or arbitration of employment-related disputes with a binding arbitration clause in their employee handbook. According to the suit, by requiring employees to bring their work-related grievances through individual arbitration, the clause prevents employees from bringing claims on a class wide basis (either in court or through arbitration). The employee may opt-out of individual arbitration, but they have to contact HR and complete the opt-out paperwork within 30 days of receiving the handbook. The NLRB claims that this requirement “violates protections guaranteed by the National Labor Relations Act.”
With the hefty cost of individual arbitration (particularly in relation to the potential recovery), employees may choose to forgo taking any action and allow the employer to continue enforcing potentially illegal practices.
The NLRB Administrative Law judge ultimately issued a decision finding that 24 Hour Fitness maintained and enforced an unlawful arbitration policy. He ordered the company to remove the prohibition against class or collective actions from the employee handbook.
The judge relied on the Board’s earlier decision in D.R .Horton, Inc. v. NLRB (Case 12-CA-025764). D.R. Horton employees were required to sign a “Mutual Arbitration Agreement” (MAA), stating that all employment-related disputes be resolved through individual arbitration and not through any class or collective litigation. The NLRB ruled that the MAA violated the NLRA because it required employees to waive their right to join together to challenge company decisions. According to the Board, the NLRA confers on employees the right to pursue discrimination, wage and hour and other workplace-related claims in a joint, class or collective fashion as “protected concerted activity.”
The NLRB decision in the D.R. Horton case, however, was ultimately overturned by a federal appeals court because the NLRB had failed to give sufficient weight to the FAA’s policy of favoring private dispute resolution based on the company’s MAA.
The EEOC’s Stance
In September 2014, the EEOC filed a lawsuit against Doherty Enterprises, the owner and operator of 140 franchise restaurants in multiple areas. The lawsuit asserts that the company violated employee rights to file discrimination cases with the EEOC. (EEOC v. Doherty Enterprises, Inc., Civil Action No. 9:14-cv-81184-KAM)
According to the case, prospective employees are required to sign a mandatory arbitration agreement as a condition of employment. The agreement mandates that all employee-related claims would be submitted to and determined exclusively by binding arbitration rather than allowing them to go to the EEOC. The agency asserts that this interferes with employees’ rights to file discrimination charges and therefore violated Section 707 of Title VII of the Civil Rights Act of 1964.
As EEOC Regional Lawyer Robert E. Wiesberg explained, “”When an employer forces all complaints about employment discrimination into confidential arbitration, it shields itself from federal oversight of its employment practices. This practice violates the law, and the EEOC will take action to deter further use of these types of overly broad arbitration agreements.”
It is important for employers to understand that the Federal Arbitration Act does not provide blanket protection for arbitration clauses in employee contracts and handbook. If you are utilizing (or plan to utilize) arbitration clauses for your company, you may want to consult with an experienced labor lawyer to discuss its enforceability. Please contact us online or call our offices at (561) 653-0008. At Scott • Wagner and Associates., our approachable and knowledgeable lawyers are dedicated to providing skilled legal representation for your unique situation.
- National Labor Relations Board
- National Law Review