Mandatory Arbitration in United States Employment Law

in Business Organizations/Employment/Public Policy

By Samantha Delbick

Introduction: Why Workers Getting Their Day in Court Matters  

In the workforce, U.S. laws guarantee the right to a safe workplace, the right to overtime pay, the right to equal treatment regardless of race, gender, sexual orientation, and so much more.[1] However, in the past three decades, the Supreme Court has allowed companies to circumvent this process altogether by allowing corporations to force workers into mandatory arbitration clauses, signing away their right to be heard in a court of law.[2] This article will examine the Court’s role in the expansion of mandatory arbitration clauses in employment contracts, the harmful effect they have on workers, and the future for arbitration law.

Mandatory Arbitration Clause – What Is It?

Arbitration clauses are typically buried in a stack of hiring documents employers require new workers to sign.[3] While arbitration proceedings do not have a uniform procedure, they typically take place in a conference room in which the arbitrator, acting like a judge, hears all the evidence and makes the final determination on the dispute.[4] Arbitrators are frequently former attorneys.[5] Unlike in a courtroom, arbitration proceedings do not have a jury, inadmissible evidence, and large scale-discovery process.[6] Without the weight of a courtroom and a jury, the outcome is dependent on the “neutrality, expertise, and fairness of the arbitrator in reaching a just outcome.”[7]

While this process can work as an effective way to bypass the cost and inefficiency of the court system, the hidden mandatory arbitration clauses in employment contracts remove formal protections for workers that “leave them vulnerable to unfair procedures and unjust outcomes.”[8] This is due in large part to the power imbalance between the people signing arbitration clauses. Employers often hide the clauses in “boilerplate” new job paperwork, so that many employees subject to arbitration clauses do not even know they exist.[9] Further, because the new employee will often be denied employment if he or she refuses to sign, the employee does not have a choice or ability to negotiate the terms of arbitration.[10]

The employer often decides who the arbitrator is and what the company’s arbitration rules will be. Since the employee had no real say in the agreement, arbitration clauses are often referred to as “mandatory arbitration clauses.”

Because the new employee will often be denied employment if he or she refuses to sign, the employee does not have a choice or ability to negotiate the terms of arbitration. 

How Did We Get Here? How Is this Legal?

In 1925, Congress passed the Federal Arbitration Act (“FAA”). Encouraged by big business interests in New York, the law was passed to allow disputes between businesses to be settled through arbitration if both businesses signed a contract agreeing to arbitration.[11]  Section 1 of the FAA explicitly declares that it should not apply to “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”[12] The “best history” of the FAA indicates that its true purpose was to settle disputes between merchants of “comparable bargaining power.”[13] It was not intended to force workers out of the court systems, and for 55 years, that’s largely what the FAA did. Then, a series of court decisions in the 1980s reinterpreted the FAA to set America on the course to the dominance of mandatory arbitration clauses today.[14]

In 2001, Circuit City Stores, Inc. v. Adams greatly expanded company arbitration power.[15] Saint Clair Adams, a sales counselor at Circuit City, sued for employment discrimination only to find that a provision in her contract required all employment disputes to be settled by arbitration.[16]  Adams argued that the arbitration agreement between her and Circuit City was contained in a “contract of employment” and therefore not subject to the FAA.[17] The Supreme Court disagreed with Adams in a narrowly interpretation of FAA §1.[18] It held that FAA §1 exempts “only contracts of employment of transportation workers,” allowing the FAA to apply to numerous employment cases.[19]

Most recently, the U.S. Supreme Court allowed employers to sign away their rights to class action law suits through arbitration clauses. In Epic Systems Corp. v. Lewis, the Court ruled in a 5-4 decision that employees bringing a wage, discrimination, or other class complaint can be barred not only from making their claim in court, but from making the claim as a class altogether.[20] Critics of the decision have stated that this “no group arbitration” decision will lower the amount of workers claims because the total amount of earnings for an individual arbitration case will be too small to be worth pursuing.[21] Critics further argue that this ruling will “make it easier for employers to maintain unfair or even unlawful employment structures and salary systems.”[22] In her dissent, Ginsburg wrote that the “inevitable result” of the decision “will be the underenforcement of federal and state statutes designed to advance the well-being of vulnerable workers.”[23]

FAA §1 exempts “only contracts of employment of transportation workers,” allowing the FAA to apply to numerous employment cases.

Section IV: Looking Towards the Future

While the courts have tended to side with employers, workers have other ways to force companies to change to their arbitration policy. In light of the #MeToo movement, several prominent companies, such as Google and Facebook, have announced they will end arbitration for cases related to sexual harassment.[24] A federal bill that prevents employers from using arbitration and nondisclosure agreements to hide harassment claims has even attracted bi-partisan support.[25] A democratic bill that would ban businesses from requiring employees to sign arbitration agreements as a condition of their employment has 57 co-sponsors in the House.[26] While the power to arbitrate has grown over through the courts, businesses would be wise to pay attention to the political landscape and consider that arbitration may not always be an the default option for employment contracts.


[1] Occupational Safety and Health Administration, U.S. DEP’T LABOR, https://www.osha.gov/workers/ (last visited Apr. 10, 2019); U.S. DEP’T LABOR, Wage and Hour Division—Overtime Pay, https://www.dol.gov/whd/overtime_pay.htm (last visited Apr. 10, 2019); U.S. EQUAL EMP’T OPPORTUNITY COM’N, Federal Laws Prohibiting Job Discrimination Questions And Answers, https://www.eeoc.gov/facts/qanda.html (last visited Apr. 10, 2019).

[2] Katherine V.W. Stone & Alexander J.S. Colvin, The Arbitration Epidemic—Mandatory Arbitration Deprives Workers and Consumers of Their Rights, ECON. POLICY INST. (Dec. 7, 2015), https://www.epi.org/publication/the-arbitration-epidemic/#epi-toc-1.

[3]  Alexia Fernández Campbell & Alvin Chang, There’s a Good Chance You’ve Waived the Right to Sue Your Boss, VOX (Sept. 7, 2018), https://www.vox.com/2018/8/1/16992362/sexual-harassment-mandatory-arbitration

[4] Id.

[5] Id.

[6] Id.

[7] Id.

[8] Stone & Colvin, supra note 4.

[9] Id.

[10] Id.

[11] Id.

[12] Garret Epps, An Epic Supreme Court Decision on Employment, THE ATLANTIC (May 22, 2018), https://www.theatlantic.com/ideas/archive/2018/05/an-epic-supreme-court-decision-on-employment/560963/; 9 U.S. Code § 1 – “Maritime Transactions” and “Commerce” Defined; Exceptions to Operation of Title, LEGAL INFO INST., https://www.law.cornell.edu/uscode/text/9/1 (last visited Apr. 10, 2019).

[13] Id.

[14] Stone & Colvin, supra note 4.

[15] Id.

[16] See generally Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001).

[17] Id.

[18] Id.

[19] See id.; Stone & Colvin, supra note 4.

[20] See generally Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612 (2018).

[21] Epps, supra note 14.

[22] Id.

[23] Id.

[24] Kerri Anne Renzulli, Workers at Google, Facebook, eBay and Airbnb Can Now Sue over Sexual Harassment—Here’s What that Means for Employees, CNBC (Nov. 19, 2018), https://www.cnbc.com/2018/11/19/google-facebook-airbnb-employees-can-now-sue-over-sexual-harassment.html.

[25] Alexia Fernández Campbell, A New House Bill Would Bar Companies from Using Nondisclosure Agreements to Hide Harassment, VOX (July 18, 2018), https://www.vox.com/2018/7/18/17586532/sexual-harassment-bill-ban-nondisclosure-agreements-ndas-congress-metoo.   

[26] Alexia Fernández Campbell, House Democrats Have a Sweeping Plan to Protect Millions of Workers’ Legal Rights, VOX (Nov. 14, 2018), https://www.vox.com/policy-and-politics/2018/11/14/18087490/mandatory-arbitration-house-democrats.