United States: Can Arbitration Agreements Protect Employers Against Class Actions?

This series examines whether an employee arbitration program can help minimize legal risks from COVID-19 and beyond.

For many employers, an important reason for rolling out arbitration is a desire to avoid class and collective actions.  In this article, we consider whether arbitration agreements live up to their billing in this regard.  As explained below, while they aren't fool-proof, for many employers and many employment claims, arbitration agreements do in fact significantly reduce the risk of class or collective actions.

First, we present the general rule, which is good news for employers.  Then we explain some of the exceptions, risks, and pitfalls that can land an employer in a class or collective action.

The General Rule

Under the Federal Arbitration Act, agreements to resolve disputes through arbitration are as enforceable as any other contracts.  The FAA applies to most arbitration agreements between employers and employees. 

State law that singles out arbitration agreements for unfavorable treatment is preempted by the FAA.  In 2011, in AT&T Mobility, LLC v. Concepcion, the Supreme Court ruled that state laws cannot prevent enforcement of agreements to participate in ordinary, two-party arbitration.  And in Epic Systems, the Supreme Court ruled that requiring employees to agree to resolve disputes through bilateral arbitration doesn't violate employees' rights under federal labor law to engage in protected concerted  activity. 

In short, employers can often require an employee to resolve a dispute through individual arbitration and it follows that the employee cannot initiate or join a class or collective action.  As explained below, this general rule is subject to a number of exceptions and can be circumvented in some circumstances.  But looking at the big picture, employers may have greater ability to enforce arbitration agreements now than ever before. 

Exceptions, Risks, and Pitfalls

Even though the general rule as to arbitration agreements has evolved favorably for employers, there are still a number of situations in which employers may not be able to enforce individual arbitration agreements.  For example: 

• The FAA (by its terms) doesn't apply to workers “engaged in foreign or interstate commerce.” It's well established that the exception includes interstate air and ground transportation providers and shipping companies that ship goods across state lines. But plaintiffs' lawyers argue that it also applies, for example, to last-mile drivers and intrastate delivery drivers, even if their activity is entirely local, where the goods or people they were transporting or handling were moving uninterrupted in the stream of interstate commerce.  Without the FAA's protection, an enforceable agreement with an employee to resolve disputes through individual arbitration may be possible in some states, but in others it may be highly unlikely.
• The California Supreme Court has ruled that employers cannot compel individualized arbitration of employees' claims that are brought pursuant to the state's private attorneys general (“PAGA”) statutes. Courts have reasoned that the state is the real party in interest in a PAGA action, and because the state is not a party to the arbitration agreement, claims brought on its behalf are not subject to the agreement's arbitration or class waiver terms.  PAGA cases cause many of the same harms for employers that class or collective actions do.  Therefore, arbitration agreements with California employees may have less value.
• Class actions brought by a federal or state government agency, such as the Equal Employment Opportunity Commission, are not precluded by agreements to bilateral arbitration.  As with PAGA claims, the party pursuing the class action on the employees' behalf is the agency, which is not a party to the arbitration agreement.
• Individualized arbitration agreements can be attacked under state contract law principles. As long as state contract principles are not hostile to arbitration agreements, the FAA permits courts to invalidate arbitration agreements on the basis of those principles.
• Notwithstanding the Supreme Court's rulings about FAA preemption, several states have passed laws that try to prevent employers from entering into bilateral arbitration agreements with their employees. For example, California law AB 51 prohibits employers from requiring employees to sign mandatory arbitration agreements that force discrimination, harassment, and wage claims into arbitration.  Similarly, New Jersey law SB 121 prohibits individualized arbitration of discrimination claims.  Even when lawyers predict confidently that a state law will eventually be found preempted it could require steady nerves for an employer to continue to enter into arbitration agreements in reliance on the FAA.
• In some cases, government contractors are prohibited from requiring arbitration of certain claims. For example, contractors with the Department of Defense are prohibited from requiring arbitration of Title VII claims and tort claims related to sexual harassment.
• Some employers may face employee push back and boycotts based on perception that arbitration is unfair and allows employers to immunize themselves from wrongdoing. For example, in the legal industry, some law students have opted to boycott law firms with mandatory arbitration agreements.  In a future article in this series, we will address some key considerations for employers when evaluating whether arbitration agreements are suitable for their organizations.
• Recently, plaintiffs' lawyers have undertaken “mass arbitration” campaigns, asserting hundreds or thousands of individual arbitration demands all at once. Because employers typically bear the filing fees, arbitrator compensation and other administrative costs associated with each arbitration demand, mass arbitration campaigns threaten employers with massive up-front costs. In a future article in this series, we will further address the risk of mass arbitration and possible counter-measures.
• In addition to the challenges above, the most profound risk is that Congress might amend the FAA. Federal legislation to prohibit employers from making arbitration agreements a condition of employment has been proposed regularly for at least 20 years and has always enjoyed strong support from Democrats.  It's certainly conceivable that a federal law preventing formation or enforcement of arbitration agreements could get traction now. 

Of course, some of the risks discussed above aren't genuine disadvantages of an arbitration program because, even if they might thwart an employer's arbitration program, they would leave the employer no worse off than if the employer had never tried to implement one.  But other risks could make arbitration a losing proposition so the decision to adopt an arbitration program should be made only after careful consideration and consultation with counsel, based on all of an employer's circumstances. 

In short, despite some exceptions, requiring arbitration on an individual basis can help reduce an employer's exposure to employment-related class and collective actions.  In future articles in this series, we will address the key issues employers should consider when evaluating whether an arbitration agreement would fit their culture, the capacity of an arbitration program to reduce legal costs, and whether arbitral proceedings are confidential.

Originally Published by , January 2021

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.