The Hidden Economic Costs of Binding Arbitration, through the Lens of Gender Equity

Just five months before Anita Hill gave her stunning testimony on Capitol Hill in 1991 about the sexual harassment she endured at the hands of Justice Clarence Thomas, the Supreme Court decided a case that tipped the scales away from employees’ rights and upheld the enforceability of binding arbitration in employment agreements.

Arbitration is a way to settle minor legal disputes inexpensively, without going to court. It was intended to make the courts more efficient by reserving their use for cases that had greater implications. The assumption was that arbitration would be as effective as deciding a case in court. Unfortunately, arbitration has proven less effective. In fact, it may be harmful.

Arbitration was created as a result of the Federal Arbitration Act, enacted in 1925. The intention was to compel resolution of contractual business disputes by arbitration instead of the court system. In fact, the drafters and advocates intended to exclude employment disputes from arbitration, but 66 years later, that changed.

Binding arbitration makes it mandatory to use arbitration instead of going to court with due process, and binding arbitration clauses are common in employment agreements today.

Let’s say an employee has a dispute with their employer. Perhaps the employee is treated differently, sexually harassed, passed over for promotion, or discriminated against on the basis of gender, age, ethnicity, ability or race. With binding arbitration, an employee may only resolve that dispute via arbitration, using an arbitrator who isn’t necessarily a lawyer and doesn’t necessarily have to follow the law. The decision happens behind closed doors, is final, and is typically confidential.

Why Is Binding Arbitration Important?

1. Widespread Use

In the last 27 years since the Supreme Court’s decision establishing that employers could require employees to submit to binding arbitration, the percentage of employees who are covered by binding arbitration has grown from 2% in 1992 to almost 40% today.

Binding arbitration is widespread and offers fewer protections for employees. A large number of workers are impacted: about 60 million in the United States. The majority of this country’s largest companies favor using binding arbitration: 80 of the 100 biggest US employers require it.

2. Loss of Labor Law Protection

Binding arbitration ultimately governs how fairly employees are treated in the workplace. The United States has a number of labor laws designed to protect workers. When employees enter into a binding arbitration agreement, often they are unwittingly relinquishing the protection of labor laws. Binding arbitration impedes the efficacy of enforcing labor protections including labor laws and due process.

3. Loss of 7th Amendment Right

Through entering into a binding arbitration agreement, employees frequently waive 7th amendment right to a jury trial, also known as due process. Employees often relinquish their right to appeal or join with other employees in a class action, this is of particular importance when claims are small and no individual employee could rationally pay to hire a lawyer.

Gretchen Carlson is a well-known example of an employee who circumvented her binding arbitration agreement with Fox News and took her claim public by suing Roger Ailes personally for alleged sexual harassment. Given her experience, Carlson became an outspoken advocate for overhauling binding arbitration agreements in employment and worked with Congress to advocate for the Arbitration Fairness Act of 2017.

4. Binding Arbitration Creates a Culture of Silence

The stories of Harvey Weinstein, Matt Lauer, Roger Ailes, Bill O’Reilly, and nearly 100 other people accused of sexual misconduct, are also the stories of survivors whose voices have rarely been heard. Binding arbitration creates a culture of silence—this year all 50 states’ attorneys general have asked Congress to exclude sexual harassment from binding arbitration agreements. This may be the beginning of the end of silence around sexual harassment. Microsoft was one of the first large employers to move away from binding arbitration in sexual harassment cases.

5. Lower Win Rates for Employees

Not only do employees have a lower win rate with binding arbitration (21% compared to 57% in federal courts and 36% in state courts), they also suffer from the employer’s “repeat player advantage:” the more times an employer appears before the same arbitrator, the lower the win rate for the employee (18% the first time, 15% after four cases and only 4.5% after 25 cases).

6. Signature Not Required

Employees don’t have to sign a binding arbitration agreement to be bound by it. Generally, there are four methods by which employees enter into binding arbitration:

1. Executives or employees with a contract
2. Employee handbook
3. Paperwork given to employee as part of onboarding
4. Employment application

It is possible to enter into a binding arbitration agreement without knowing it.

The Economic Costs of Binding Arbitration

In a country where the pay gap persists, as does the opportunity gap for women, binding arbitration is like putting lead on the glass ceiling. If we want to close the gender equity gap, we need to take a closer look at how binding arbitration agreements hold everyone back.

Binding Arbitration Dampens Women’s Ambition

Viewed through the lens of gender equity, it could be said that binding arbitration is stifling women’s ambitions and damaging our economy. When inequity related to gender arises, it is often hidden through arbitration, and at a time when we are facing a global human capital crisis, dampening women’s ambitions is something this country cannot afford. 

[Related: 6 Surprising Reasons Why Companies Should Want Gender Equity and Now]

We are also now observing the migration of women within companies. Data shows that women, in a plausible attempt to shield themselves from potential workplace issues, are shifting into more female-dominated roles. The legal restrictions women face in today’s workplace, when connected to the shift in their career choices, potentially demonstrates the dampening of ambitions as the result of these legal restrictions.

Personal Safety vs. Economic Security

When employees are subjected to binding arbitration agreements, they are frequently unaware that, should a claim arise, they may be choosing between their personal safety and their economic security. This hidden choice has the potential to hinder overall productivity at work. Studies show that psychological safety is key to team efficacy; when employees feel compromised, it is difficult for them to feel secure and workplace performance is impacted.

What Can We Change?

Gender equity is not just a social issue, it is a tremendous economic opportunity. It could be argued that binding arbitration impedes our ability to achieve gender equity—ever. To harness the capabilities of women and men in the workforce, we should examine the growing trend of binding arbitration. Here are two recommendations.

1. Corporate Transparency and Accountability

When Marc Benioff, CEO of Salesforce, discovered they had a gender pay gap, he went public with the news. After Salesforce closed their pay gap, they shared their results. Then they closed the gap again, and shared again. If more businesses were to follow the lead of Salesforce and act out of transparency, they could increase the level of trust with employees—inside and outside of their company.

2. Pass the Burden of Proof to the Companies

Iceland passed an equal pay law that went into effect on January 1, 2018. One of the significant shifts this law made was to move the burden of proof of equal pay from the employee to the employer. US equal pay laws require an employee making a claim to prove their employer is paying them unequally, a potentially difficult task. Shifting the burden of proof to companies has the potential to move us even closer to achieving gender equity.

Data shows that gender equity creates clear economic benefits for companies. If employers were to move away from compelling arbitration, towards transparency and accountability, gender equity should become easier to achieve.

The original article first appeared here.