THE PUBLIC-POLICY IMPLICATIONS OF MANDATORY EMPLOYMENT ARBITRATION

THE PUBLIC-POLICY IMPLICATIONS OF MANDATORY EMPLOYMENT ARBITRATION

By

Marick F. Masters*

November 24, 2017

The use of mandatory employment arbitration (MEA) has grown considerably in recent decades. According to a recent study by Alexander Colvin (“The Growing Use of Mandatory Arbitration,” Economic Policy Institute, September 27, 2017), most employers surveyed have adopted MEA, covering an estimated 56.2 percent of the nonunion workforce, or slightly over 60 million employees. A series of U.S. Supreme Court decisions, including Gilmer v. Interstate/Johnson Lane (1991), has fueled the growth in MEA by upholding the enforceability of such agreements under the 1925 Federal Arbitration Act (FAA). Notwithstanding its increasingly broad application, the MEA employment practice has continually provoked legal and public-policy controversy. Opinion has diverged sharply on the permissibility of MEAs under the FAA; and debate has continued among lawmakers over the public-policy wisdom of allowing this practice. In fact, a little known provision of the Defense Appropriations Act of Fiscal Year 2010, which has been periodically re-enacted by the U.S. Congress, has forbade the awarding of certain contracts to employers which use the MEA (see U.S. General Accountability Office’s decision in the matter of L3 Unidyne, Inc., issued on October 16, 2017).

           A common MEA requires the acceptance of such an agreement as a condition of initial hire or continued employment by affected workers. It requires that these workers forfeit their right to file suits in court claiming violation of enumerated statutory protections, such as Title VII of the Civil Rights Act, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the Family and Medical Leave Act, and the Fair Labor Standards Act. Forfeiture of the right to sue is frequently coupled with the waiver of the right to file a class-action claim. The aforementioned study by Colvin (2017) estimates that over 40 percent of the employees covered by an MEA agree to such a waiver as part of the mandated agreement. 

           Reflecting the ongoing legal controversy over the use of the MEA, especially when coupled with a class-action waiver, the U.S. Supreme Court is considering a trilogy of cases which challenge the validity of such a waiver under the National Labor Relations Act (NLRA). A split of opinion exists among selected federal courts of appeal as to whether the class-action waiver violates the right of employees to engage in “concerted activities” under Section 7 of the NLRA. 

           More broadly, however, than specific legal disputes as to the legitimacy of either the MEA or an attendant class-action waiver is whether public policy at federal or state levels should sanction this sort of requirement. This is a question that merits deliberate consideration by lawmakers, and it is one that should be informed by carefully extended research. On the immediate surface, an MEA provision may seem to extend limited internal organizational protection to covered employees from unjust employer actions through an arbitral process which putatively offers advantages vis-à-vis litigation. But the devil is in the detail. A great deal depends on the design and implementation of an MEA. In addition, serious disagreement exists as to mandating the forfeiture of legal rights in the first place. 

        We propose several criteria by which to evaluate the MEA practice, along with the companion class-action waiver. We urge more research on how the MEA performs on these criteria, especially in comparison to litigation. Evidence on the relevant performance of labor arbitration, which has a rich history of practice in the unionized context, may serve as a useful comparative benchmark.

Five Analytical Criteria

1. Voluntariness

An argument can be made that requiring prospective or current employees to forfeit their legal rights as a condition of employment is inherently unfair. Obviously, any prospective or current employee could simply refuse to do so, but s/he may experience considerable personal, professional, and economic hardship as a result. Conditioning employment on such a forfeiture not only signals the lopsidedness in the tilt of power between the employee and employer but also limits the utility of extant legal protections.

2. Equity

Any dispute-resolution provision is subject to evaluation on grounds of procedural and substantive equity. Does the provision provide for sufficient evidentiary and discovery rules to ensure that an aggrieved employee can get a fair hearing in the arbitral process? Are arbitrators chosen on a transparent basis that allows for employee input? Are arbitrators compensated in such a way as to promote impartiality? Are employees entitled to adequate legal representation? Are the remedies available sufficient to provide justice to the aggrieved party and/or to deter future employer misconduct? Is there evidence of any systematic bias in arbitrators’ decisions?

3. Efficiency

The efficiency criterion concerns the relative cost and speed of the dispute-resolution process. Employers are generally in a much stronger position to absorb the costs of an arbitral process, which include compensating legal counsel, paying for the fees and expenses of the arbitrator, conducting appropriate investigations to gather the relevant facts, arranging and paying for an administered procedure provided by an entity such as the American Arbitration Association (AAA), and procuring the testimony of witnesses. An individual employee may simply lack the money and/or time to pursue a case without the assistance of a governmental agency, such as the Equal Employment Opportunity Commission, or a labor union that provides for representation in grievance procedures that culminate in arbitration. Furthermore, an employee’s claim may involve a relatively small amount of money, which renders individual pursuit of a remedy impractical. For instance, a dispute on overtime compensation may involve such a small amount on an individual basis as to make it literally irrational to seek relief unless part of a larger class-action suit. 

The second leg of the efficiency criterion is speed. Mandatory employment arbitration, which is considered a form of alternative dispute resolution (ADR), is often touted as a much quicker route to resolution of a disagreement than litigation. ADR is intended at least in part to obviate the problem of justice delayed is justice denied. The relative speed of the MEA practice is an empirical question (as is the cost issue). If an arbitral procedure acquires the characteristics of litigation, then its presumed time advantage might wane. In this regard, labor arbitration has been historically criticized for this very reason. As R. W. Fleming (“The Labor Arbitration Process: 1943-1963,” Kentucky Law Journal, 52, 4 [Summer] 1964: 819) observed, “The complaint is that [labor] arbitration has become more costly, less prompt, and more burdened with unnecessary ‘legalisms.’”

4. Employee Involvement

Another important evaluative consideration is the extent to which employees (and management in general as opposed to legal counsel in particular) have participated in the design of the arbitral process. Labor arbitration results from a bilateral negotiation between a union and employer to adopt a particular grievance procedure into a contract between the parties. To assure fairness and maintain the appearance of fairness, the design and implementation of employment arbitration procedures should provide for some sort of employee involvement. In this regard, it may be worthwhile to consider amending the NLRA to permit various degrees of worker representation to require such involvement.   

5. Confidentiality

Arbitral procedures are relatively private while judicial proceedings are open to the public. The exposure of open forums may prove embarrassing and harmful to individuals and employers. Such exposure, however, may well serve to deter future misconduct. A mutual desire by the parties to preserve some confidentiality may weigh significantly in how this criterion factors into the overall calculus.

           In sum, there are a variety of criteria policymakers should consider in assessing the merits of employment arbitration, from its design to operationalization. Research on the performance of dispute-resolution procedures (employment arbitration—mandatory and voluntary; labor arbitration; and litigation) should inform their public-policy decisions. The matter of requiring prospective and current employees to forfeit their legal rights in the workplace is too consequential to escape debate in the halls of Congress and the states’ legislative chambers. 

*Marick F. Masters is Director of Labor@Wayne at Wayne State University, where he is also a professor of business and adjunct professor of political science.