The Rise of Arbitration and the Fall of Employment Claims

When a new employee skims the pages of her employment contract hurriedly, excited to start her new position, she will probably barely notice a clause requiring her to arbitrate future employment claims. If she does notice the clause, she might think it sounds reasonable, especially because she does not believe she will ever want to bring a claim anyway. Or, she may simply feel she has little choice but to sign the agreement if she wants her job. Years later, should she face consistent sexual harassment at work, she may find that no lawyer will take her claim because of the arbitration clause in her employment contract. These kinds of agreements now cover an estimated 60 million employees. But in a recent paper, Cynthia Estlund, a professor at New York University School of Law, argues that these provisions are being used by employers to get employees to do what the law forbids them to do: waive their employment rights. Over half of the contracts that non-union private sector employees sign now include mandatory arbitration agreements, and these agreements prevent employees from taking any claims to court, including wage and hour violations, discrimination cases, and benefits issues. These agreements often give employers the power to choose the arbitration provider and structure of the arbitration proceedings. The clauses also usually prohibit employees from collectively suing as part of a class action. Estlund claims that these provisions keep employees from pursuing legitimate workplace complaints at all. She estimates that employees file under 2 percent of employment claims subject to mandatory arbitration, meaning as many as 722,000 claims fall into the “black hole of mandatory arbitration” and never undergo formal adjudication. She bases her estimate on a comparison between the number of claims filed by employees covered by mandatory arbitration agreements and the number filed by employees who can bring employment claims in court. These numbers are very rough since, unlike judges in litigation, arbitrators do not publicly file results. Estlund, however, argues that “the jaw-dropping disparities in estimated filing rates between courts and arbitration” sufficiently indicate the magnitude of the problem, despite imprecise numbers. Why is there this massive difference in filings between employees who work under mandatory arbitration agreements and those who do not? It seems unlikely that employees under mandatory arbitration agreements experience 98 percent fewer employment law violations, Estlund argues. Instead, claims pursued via mandatory arbitration have a lower chance of success and, even if they do succeed, yield lower awards. As a result, fewer attorneys want to take such cases, according to Estlund. In addition, short limitations periods, unaffordable arbitrator fees, and limited discovery procedures can all undermine an employee’s ability to make a claim. Many claims have small individual awards, like wage and hour claims, that would cost more to arbitrate than they would yield. If employment agreements bar employees from participating in class actions, these claims will also be abandoned. Original proponents of arbitration saw it as a means for employees to get awards without the delay and expense of a court proceeding. Yet, Estlund believes the data show that arbitration clauses in employment contracts lead to dramatic under-enforcement of employment laws. Rights under minimum wage, employment discrimination, and safe workplace statutes are all, by law, unwaivable. But employment agreements that bind employees to an unaffordable and unwinnable process effectively amount to a waiver of rights, according to Estlund. As she puts it, a mandatory arbitration provision in an employment contract “virtually amounts to an ex ante exculpatory clause, and an ex ante waiver of substantive rights that the law declares non-waivable.” She argues that Congress should alter the Federal Arbitration Act, a law that facilitates and encourages arbitration as an alternative to the court system, either by preventing the application of that law to employment cases or by requiring fairer standards in arbitration. Absent legislative change, Estlund hopes that the U.S. Supreme Court will alter its interpretation of the Federal Arbitration Act. In all of its recent decisions, the Supreme Court has given increasing latitude to employers seeking to use arbitration agreements. According to Estlund, the Court has generally declined to inquire more deeply into the fairness of individual arbitration clauses and has held that there is sufficient fairness in the process as long as the clause does not block access to arbitration. The Supreme Court this term had a chance to revise its precedent in a case that centered on whether employees’ right to collective action under the National Labor Relations Act (NLRA) invalidates arbitration clauses that prevent collective litigation. The Court held that these provisions requiring individualized arbitration proceedings are enforceable. Estlund’s analysis suggests that the Supreme Court’s decision will have enormous implications for the enforceability of employment rights. Since the Court has held that the NLRA allows employers to prevent collective actions, it could mean employers can circumvent almost all employment laws by effectively forcing employees to waive their rights under arbitration clauses