The Impact of Restricting Mandatory Arbitration

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Employers who use arbitration agreements for their employees now face a new challenge: claims of sexual assault and sexual harassment can no longer be subject to mandatory arbitration. President Biden signed a new law amending the Federal Arbitration Act with this provision on March 3, 2022.

Arbitration is a confidential process for dispute resolution. Litigants can opt to use an arbiter, who is often a practicing attorney, instead of going to court. Employers usually believe that arbitration holds numerous benefits, but employees are not always so sure.

Most arbiters of employment law claims have spent the majority of their careers representing employers. It is difficult not to develop some implicit biases after years of perceiving employment claims primarily from one perspective. One can understand that employers and workers might view arbitration differently.

Arbitration has mainly been favored by employers for its supposed time and cost efficiencies. Proponents of arbitration argue that discovery (the exchange of documents and information that will be used as evidence in a claim) is the principal expense of litigation, and the usually more limited scope of discovery in arbitration makes the private forum more attractive than a court room.

It is true that discovery is the costliest aspect of litigation, but questionable how effective arbitration is at limiting the associated cost. Like most aspects of the legal world, much of the cost of discovery is related to the lawyers and the litigants in a matter.

The confidential nature of arbitration can also appeal to employers, enabling them to avoid the critical eye of the media and any associated reputational harm. But employees have felt that arbitration essentially allows employers to hide their misdeeds, especially when they are repeated.

Nowhere has this concern been more prominent than in the #MeToo movement and its aftermath. #MeToo revealed how confidentiality and arbitration agreements helped mask pervasive issues, particularly sexual assault and sexual harassment in the workplace. Time and time again, arbitration clauses were used to keep workplace misconduct claims quiet, enabling bad behaviors in the workplace to continue unabated. According to employee advocates, if harassment or assault in a workplace had become known, more could have been done to stop it earlier, thereby avoiding subsequent victims. After all, bad behavior thrives when it’s hidden.

Removing mandatory arbitration allows for misconduct claims to be made public. This exposure can be very impactful in terms of pressuring companies to reach a resolution with an individual. The public eye can also lead companies to course-correct and adequately address ongoing toxic workplace cultures. Further, the arbitration ban can incentivize businesses to prevent workplace misconduct before it even starts, leading to healthier workplace environments.

The new law does not enact a total ban on the use of arbitration in sexual harassment and assault cases; it merely prohibits an employer from making it mandatory. That means an employee may still opt for arbitration. Employees may have their own reasons for keeping a claim confidential, and the amended law permits them to choose this option if they desire.

Regardless of whether arbitration is an effective litigation forum for employees, the new law gives employees greater control over where a sexual assault or sexual harassment is litigated. And that control will likely impact other claims because most employee claims of sexual assault are often tied to claims of discrimination, retaliation, or other federal, state, or local claims.

An employer with a mandatory arbitration clause can decide to force some claims to arbitration while allowing others to proceed in court, but then the purported cost savings go out the window. Going forward, employers need to consider their motivations for using mandatory arbitration carefully. And, if they decide arbitration still meets their goals even with the new law, they need to make certain that their mandatory arbitration contract terms comply with the new law.

Prohibiting mandatory arbitration of sexual assault and sexual harassment claims doesn’t mean bad behaviors won’t happen, but with sexual harassment training and a true commitment to a positive workplace culture, employers can minimize bad behaviors that lead to big risk exposure.