Proposed law would fundamentally change employment arbitration

On December 6, 2017, a bill was introduced in the U.S. Congress proposing an act entitled the “Ending Forced Arbitration of Sexual Harassment Act” (EFASHA). Sponsored by three legislators (Rep. Cheri Bustos (D-Ill); Sen. Kristen Gillibrand (D-N.Y.) and Sen. Lindsey Graham (R-S.C.)), EFASHA would fundamentally alter the application of the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq., to employment contracts.

The bill

EFASHA would add new sections 401 and 402 to the FAA. Section 402(a) provides that “no predispute arbitration agreement shall be valid and enforceable if it requires arbitration of a sex discrimination dispute.”  EFASHA § 2(a) (proposed 9 U.S.C. § 402(2)).  The bill, in turn, defines “predispute arbitration agreement” as “any agreement to arbitrate a dispute that had not yet arisen at the time of the making of the agreement.” Id. (proposed 9 U.S.C. § 401(2)).  The bill further defines “sex discrimination dispute” as any dispute between an employer and employee “arising out of conduct that would form the basis for a claim based on sex under title VII of the Civil Rights Act of 1964 . . . .”. Id. (proposed § 401(1)).  Employers often include pre-dispute arbitration provisions in written employment contracts or establish policies that make abiding by a pre-dispute arbitration procedure a condition of employment and/or continued employment.  EFASHA would preclude an employer from enforcing such pre-dispute arbitration contract provisions or policies to the extent that they include arbitrating an Title VII sex discrimination claim, which would include disparate treatment, disparate impact, and sexual harassment claims.

EFASHA does not affect the enforceability of an arbitration provision in a collective bargaining agreement (“CBA”), EFASHA § 2(a) (proposed § 401(b)(2)), but does specify that CBA provisions cannot have the effect of waiving the right of an employee to seek judicial enforcement of state or federal constitutional or statutory rights. Id.  In a “technical and conforming amendment,” the bill strikes language from 9 U.S.C. § 1 governing the applicability of the FAA to contracts of employment.  EFASHA § 2(b).  This legislation, if enacted, would apply to any dispute arising on or after the date of enactment. Id. § 3.

Coming on the heels of highly publicized incidents of sexual harassment in private sector and governmental workplaces, EFASHA takes aim at “forced arbitration” of claims of gender discrimination or harassment. According to the bill’s supporters, pre-dispute arbitration agreements covering employment claims “put the employee at a severe disadvantage” by giving the employer the ability to “mandate arbitration before claims even arise.” (Sen. Graham).  Arbitration, it is claimed, “means that if a worker is sexually harassed or sexually assaulted in the workplace,” the worker is not allowed to go to court over it and “instead [the worker may] have to go to a secret meeting with [the] employer and try to work out some kind of deal that really only protects the predator.” Id. (Sen. Gillibrand).  Additionally, because such arbitration proceedings often are confidential, such a proceeding “keeps harassment complaints and settlements secret.” Id. (Gretchen Carlson).

Background

As recognized by the U.S. Supreme Court in an extensive and consistent line of decisions applying the FAA to a variety of arbitration agreements under the FAA over the past 40 years, the FAA was passed by Congress in 1925 to overcome “judicial hostility to arbitration.” CompuCredit Corp. v. Greenwood, 132 S.Ct. 665, 669 (2012).  The FAA “establishes a liberal federal policy favoring arbitration agreements” and “requires courts to enforce agreements to arbitrate according to their terms.” Id. (citation omitted). See also AT&T Mobility LLC v. Conception, 131 S.Ct. 1740, 1745 (2011).  Even when claims covered by an arbitration agreement arise under a federal statute, they must be arbitrated unless there “a contrary congressional command.” Shearson American Express Inc. v. McMahon, 482 U.S. 22, 226 (1987).  This principle has been extended to enforce arbitration agreements covering claims arising under federal employment discrimination laws. E. g., Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 25 (1991) (federal age discrimination claim).  Thus, it has become well established that pre-dispute arbitration agreements covering federal and state law claims of discrimination and/or harassment are generally fully enforceable under the FAA.

EFASHA is not unlike other measures that opponents of pre-dispute arbitration agreements have pursued in recent years to circumvented this strong body of pro-arbitration Supreme Court precedent. An amendment to the Defense Appropriations Act of 2010 prohibited the appropriation of any funds for future defense contracts with a contractor that required, as a condition of employment, that any of its employees arbitrate Title VII claims or tort claims arising out of sexual harassment or assault. Id. § 8116. That measure, sponsored by Senator Al Franken, had limited utility as it only applied to contracts issued under that particular statutory appropriation. Similarly, the Dodd-Frank Wall Street Reform and Consumer Protection Act prohibited pre-dispute arbitration agreements in certain contracts, for residential mortgage loans and home equity lines of credit, and required the Consumer Financial Protection Bureau to study the use of arbitration agreements in other consumer financial contracts.

More recently, pursuant to Executive Order 13673 (July 31, 2014), the Obama Administration implemented amendments to the Federal Acquisition Regulation requiring, inter alia, that federal contractors obtaining government contracts for non-commercial items over $1 million not enter into any mandatory, pre-dispute arbitration agreements with their employees or independent contractors covering any Title VII claim or any tort claim based on sexual assault or sexual harassment.  See FAR, “Fair Pay and Safe Workplaces,” 81 Fed. Reg. 58654 (Aug. 25, 2016).  Enforcement of Executive Order 13673 and these rules were enjoined by a federal district court on the ground that they conflicted with the pro-arbitration policy of the FAA and the Executive Branch had no authority to modify the FAA. Associated Builders & Contractors of Southeast Texas v. Rung, 2016 WL 8188655 at *14 (E.D. Tex. Oct. 24, 2016).  Executive Order 13673 was later revoked by the Trump Administration. See Executive Order 13782 (Mar. 27, 2017).

Analysis

Congress passed the FAA and has the power to amend it. Because EFASHA is a proposed amendment to the FAA by Congress, it does not suffer from the same lack of authority that served to invalidate the administrative actions at issue in Associated Builders.  However, EFASHA raises several issues and impacts on arbitration of employment disputes that will need to be addressed as the measure winds its way through the legislative process.

• Exclusion of all employment contracts from the FAA. Perhaps the most potentially significant effect of EFASHA is the proposed amendment to 9 U.S.C. § 1.  Section 2 of the FAA – the primary enforcement-of-arbitration agreements tool – makes the statute applicable to any contract “evidencing a transaction involving commerce.”  9 U.S.C. § 2.  “Commerce,” in turn is defined by section 1 to exclude “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Id. § 1.  Although this language suggests a broad exclusion of all employment contracts involving workers in interstate commerce, it has been narrowly interpreted by the Supreme Court to exempt from the FAA “only employment contracts of transportation workers.” Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 119 (2001).  Thus, arbitration agreements in employment contracts outside the transportation sector are generally enforceable under the FAA.

EFASHA potentially changes all of that. In a “technical and conforming amendment,” section 2(b) of EFASHA amends 9 U.S.C. § 1 by striking the phrase beginning with “of seamen” so that 9 U.S.C. § 1 would define “commerce” to exclude “contracts of employment,” not simply contracts of employment “of seamen [and other transportation workers].”  In other words, no contract of employment would be subject to the FAA.  The implications of this are far-reaching.  Because the at-will employment relationship is considered contractual in nature in many jurisdictions, this exclusion would presumably cover not just written contracts of employment, but also employment-at-will where arbitration of employment disputes is made by the employer to be a condition of employment or potential employment.  This broad exclusion of employment contracts from the FAA would re-introduce into this area many of the state law anti-arbitration obstacles that the Supreme Court has consistently rejected over the past 40 years.  The Supreme Court has consistently found that state laws that burden arbitration agreements with special procedural or substantive requirements are pre-empted by the FAA. E.g., Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 687-88 (1996) (Montana statute requiring first-page notice requirement for arbitration agreements pre-empted by FAA).  Taking employment contracts out of the pre-emptive scope of the FAA, as EFASHA proposes, would likely render such contracts subject to whatever anti-arbitration legislation a state legislature might choose to impose.  Based upon this, a state legislature potentially could, by statute, prohibit pre-dispute arbitration agreements as to any form of employment discrimination.  Or, it could potentially bar any arbitration clause in an employment contract.  The FAA would not be a remedy for the employer in either case.

It is unclear why the drafters of EFASHA believed such a significant change in the FAA is warranted. The exclusion of all employment contracts from FAA coverage appears overly broad and not tied to the stated rationale of the legislation, which was to exclude sexual discrimination and harassment of Title VII claims from pre-dispute arbitration.

• Why confine the measure to sex-based discrimination and harassment claims under Title VII? EFASHA focuses on the pre-dispute arbitration of sex-based discrimination and harassment claims, likely due to such issues of harassment in the workplace being top-of-mind in recent weeks, but there is no apparent reason to exclude those claims – as opposed to other discrimination and harassment claims – from pre-dispute arbitration.  As the court in Associated Builders noted, it was “curious” that the measure in that case was similarly limited and did not apply to “employees alleging age or disability discrimination.”  2016 WL 8188655 at *14.  If, as EFASHA’s proponents argue, pre-dispute arbitration is not fair to the employee, then such concerns might logically carry over into cases involving other forms of employment discrimination or harassment.  And if arbitration has its advantages to the employee, as many authorities argue, there is no apparent reason to take such advantages away from the Title VII sex-discrimination/harassment claimant.
• Is it arbitration or confidentiality that is the issue? The proponents of EFASHA have seemingly conflated concerns about the purported “unfairness” of arbitration with issues that arise when the arbitration proceeding is confidential.  The “unfairness” point is widely debatable.  It is not a given that employers have an advantage in an arbitration proceeding or that employees frequently do not prevail.  The inherent unfairness argument has been soundly rejected by the Supreme Court.  The right to a jury trial in a civil case in federal court is not absolute and can be waived, not only by contract, but by simply failing to invoke it.  Arbitration offers efficiency and low cost to an employee who might not otherwise have the resources to pursue a protracted judicial case.  The purported “secrecy” of arbitration also is debatable.  The FAA does not mandate confidentiality and, were “secrecy” deemed to be the real issue, it could be remedied by an FAA amendment that prohibits confidential arbitration of discrimination claims without barring enforcement of arbitration agreements altogether.  In any event, confidentiality is often an advantage to the employee in a disparate treatment case who may not want the alleged deficiencies in his or her job performance played out on the public record of a court case.
• State law claims. EFASHA, by its terms, is limited to disputes arising under Title VII.  As a consequence, claims arising under state or local fair employment statutes or ordinances would not be covered by the statute and therefore would remain subject to and pre-dispute arbitration agreements that covered them.  Given the limits on monetary recovery for certain types of damages under Title VII, state law discrimination claims may create greater monetary exposure for the employer than Title VII claims do and often are the claims of choice by some employment lawyers or claims brought together with Title VII claims.  Such claims would remain subject to mandatory arbitration.

Given its potential impact on the arbitration of employment claims, EFASHA is a measure that bears monitoring by employers and employees alike.