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Understanding the Legality of Individual Arbitration Clauses in Employment Contracts

More employers have recently started adding individual arbitration clauses to their employment contracts. These clauses essentially state that employees who have a legal complaint against their employer cannot file a joint complaint with other employees who have had similar experiences.

The issue at hand concerns whether employment contracts with arbitration clauses can legally prevent employees from filing class action suits or collaborative actions against their employers. Several cases to be heard by the U.S. Supreme Court in the coming months will provide greater certainty. In the meantime, here's what you need to know.

Background

To better understand the argument against individual arbitration clauses, consider the nearly 10-year-old case against Sterling Jewelers, the parent company of the Kay, Zales, and Jared brands.

In this case, nearly 15 women had accused the company passing them over for promotions and pay raises that were given to their male colleagues. Because each of them had signed an individual arbitration agreement, the complaints were filed separately. None of the women were aware of the other's complaints, putting their cases at a significant disadvantage.

The case took a turn due to the fact that the clause in question did not explicitly prohibit the employees from joining together. The women were able to pool their resources, retain better lawyers, and hire the necessary experts.

The complaints have now turned into a class action lawsuit covering 69,000 current and former employees of Sterling Jewelers. The women's attorney, Joe Sellers, argues that upholding individual arbitration laws would harm employees with similar cases in the future.

Arguments Against Individual Arbitration Clauses

One of the key problems with individual arbitration clauses is that employees are often forced to agree as a condition of employment. Some argue that this falls under the concept of a yellow dog contract which was deemed unenforceable under Federal law in 1932.

Supporters further argue that employees who are faced with pursuing a lawsuit alone are more likely to back down. If this occurs repeatedly, employers have little incentive to correct ongoing workplace violations. On the other hand, when class action suits come to light, employers must defend their actions under the public's watchful eye.

Arguments Supporting Individual Arbitration Clauses

Employers argue that class actions lawsuits are often abused. When a single employee can bring suit on behalf of co-workers it immediately becomes more powerful, regardless of the actual merits of the case. Some employers are concerned about being blackmailed into paying higher settlements simply to avoid the threat of collective action.

Single arbitration cases also settle far more quickly than class action suits, which can take years to resolve. While some parties argue that class action is more likely to curb poor employer behavior, their counterparts contend that multiple arbitration suits for the same offense provide sufficient financial incentive to make a change.

Perhaps the strongest argument supporting individual arbitration clauses is that they are contracts which the National Labor Relations Board does not have the power to invalidate.

The Bottom Line

The Economic Policy Institute estimates that more than 60 million workers are now covered by mandatory arbitration clauses. Of these, 25 million are explicitly prevented from collective arbitration.

Upcoming Supreme Court rulings will offer greater clarity to both sides. In the meantime, the best thing employers can do is ensure that policies and procedures are in place to avoid potential allegations of impropriety. If legal situations do arise, employers are advised to immediately consult a qualified attorney.

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