What You Need to Know About Mandatory Arbitration

More than 55 percent of U.S. workers are subject to mandatory arbitration. (Getty Images)

Starting a new job can stir up excitement and anxiety. In that emotional whirlwind, it’s easy to overlook practical tasks such as closely reading your employment contract.

But that document may contain terms and conditions you should know about in advance, not discover later after you’ve signed away your rights.

“Everyone’s an optimist,” says Tom Spiggle, an attorney and owner of The Spiggle Law Firm, which defends workers. “Most people, when they are getting a new job, they’re not thinking about when they’re getting fired.”

Among these important terms is a mandatory arbitration clause. This prohibits workers from taking disputes they have about workplace discrimination, harassment, wage theft and unjust dismissal to court. Instead, employees bound by these agreements must settle grievances with their employers in private proceedings presided over by arbitrators.

Mandatory arbitration has made headlines recently thanks to a Supreme Court ruling allowing companies to require workers to arbitrate their disputes individually, rather than take collective action against an employer. The decision will make it harder for employees to wrest damage payments from companies and change bad corporate behavior, experts say.

“That’s a big deal, and that’s bad for employees, there’s no way around it,” Spiggle says.

The Fine Print

Odds are you’ll encounter a mandatory arbitration clause in your career. More than 55 percent of U.S. workers are subject to one, according to 2018 research by Alexander J.S. Colvin, a professor and associate dean in The ILR School of Cornell University, published by Economic Policy Institute. They’re more common at large corporations and at organizations with lower pay levels. Among the 12 states with the highest populations, they’re found most often at companies in North Carolina, Texas and California.

Arbitration shares some similarities with the public court system. Both involve two disputing parties arguing their cases before a third party, which decides a winner and awards damages.

But there are key differences. Court cases tend to move more slowly than arbitration cases, which are often more efficient. Court cases are matters of public record, leaving paper trails that anyone can access, while arbitration cases are private and under no obligation to release information. Some employers take this privacy a step further, requiring workers to sign nondisclosure or nondisparagement agreements and keep proceedings secret.

Court cases are decided by judges and juries, neutral parties with no vested interest in the outcome. Arbitration cases are decided by arbitrators, often retired judges or lawyers who are paid by one or both parties.

“It’s someone who has experience with legal systems still applying law, just doing it in a private context,” says Ryan Mick, an attorney at Dorsey & Whitney who represents employers.

While court decisions can be appealed, that’s harder to do in arbitration cases, says Brian Balonick, a lawyer at Cozen O’Connor who represents employers: “They’re pretty close to being final.”

Why do these differences matter? Workers’ rights advocates argue that the arbitration process is biased in favor of companies, and there’s data to support that assertion. A 2015 study found the employee win rate in arbitration is 35.7 percent lower than in federal court. A 2011 study found that the median damages award to employees in arbitration is only 21 percent of the median award in federal courts and 43 percent of the award in state courts.

“Juries are just more sensitive to the realities of the workplace,” says Carney Shegerian, an employee rights attorney at Shegerian & Associates. “Arbitrators have consistently been much more conservative and more pro-employer. In California, they’re paid by the employers, who offer repeat business. When employers come before them time and again, there’s a gravitation to the employer.”

[See: Be Thankful for These 6 Workplace Rights.]

Collective Action

Some disputes workers have against their bosses are relatively minor, such as wage theft amounting to several hundred or a few thousand dollars. But if many co-workers realize they are all experiencing similar injustices, they may be able to bring a collective-action or class-action suit against the company – and win big.

“We tend to see more systemic changes as a result of collective action. It’s a real way to force significant change nationwide,” Spiggle says. “The company has to sit up, take notice and litigate that.”

Employers, of course, don’t like collective-action suits, which are “much more expensive and more risky” than individual cases, Mick says. “The consequences of losing a class action can be catastrophic.”

That’s why employers embraced the Supreme Court’s May 2018 decision in the case Epic Systems Corp. vs. Lewis, which ruled that companies can use mandatory arbitration clauses to prevent workers from joining together to take legal action as a unit.

Nearly a quarter of private-sector, nonunion employees can’t bring class-action claims thanks to their employment contracts, according to the Economic Policy Institute report.

“Forcing them to go to arbitration really blunts that collective power that they have,” Spiggle says. “Rather than 1,000 people joining together in federal court, you have 1,000 claims going to an arbitrator.”

[Read: 5 Workplace Laws Your Employer Might Be Violating.]

Sexual Harassment

Although mandatory arbitration agreements bar workers from going to court, they don’t prohibit them from making claims to the federal Equal Employment Opportunity Commission. That means people who believe they have experienced discrimination at work due to race, color, religion, sex, sexual orientation, gender identity, age or disability may still seek governmental support in resolving their disputes.

However, the EEOC pursues only a small fraction of filed cases, experts say.

That leaves some targets of workplace sexual harassment who are subject to mandatory arbitration without much hope of justice. But the #MeToo movement has exposed this predicament, prompting new efforts to free sexual harassment claims from private arbitration.

Among the biggest: Last December, two U.S. senators introduced the Ending Forced Arbitration of Sexual Harassment Act of 2017, a bipartisan bill that would void forced arbitration agreements in the case of alleged sexual harassment. Microsoft endorsed the bill and voluntarily ended its practice of requiring arbitration for sexual harassment claims.

“I would expect to see efforts to pull sexual harassment claims outside of arbitration,” Mick says. “Whether those efforts are successful, that’s an open question.”

[Read: How to Shut Down Workplace Sexual Harassment.]

If You Encounter a Mandatory Arbitration Clause

If the employment contract for a job that interests you contains a mandatory arbitration clause, you’ll usually have only two options: Accept the job and forfeit your right to file a future grievance in court, or turn down the offer altogether. That’s because employers rarely negotiate their arbitration policies, experts say.

“We have represented a very few people who have been able to do that,” Spiggle says. It usually only works for candidates who are “pretty high up and highly sought after, usually executives.”

Even so, it may be worth trying to negotiate the specifics of the arbitration clause, such as who serves as the arbitrator and which party pays the attorney, arbitrator and transcript fees.

“Even though that language is neutral, the practical implications for an employee are much more dire,” Spiggle says.

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