New Developments in Employer Arbitration

In March 2022 President Biden signed into effect a law that makes it illegal for U.S. employers to compel an employee to arbitrate a claim of sexual assault or sexual harassment.

The law – titled “Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021” (the “Act”) - amends the Federal Arbitration Act (the “FAA”) and applies to the type of arbitration provisions and class action waivers often made part of or delivered together with employer confidentiality or invention agreements presented to employees at onboarding. These provisions – referred to by the Act as “Predispute” arbitration agreements and “Joint-Action Waiver[s]” – are broadly intended to require workers with a dispute against an employer to pursue those claims not in court and not on a class or collective action basis but individually through arbitration procedures (a dispute resolution mechanism that on balance favors employers). A significant share of U.S. private-sector employers requires mandatory arbitration and/or class action waivers and the use of such provisions typically extends to a broad range of claims (e.g., wrongful termination, intellectual property disputes, contractual disputes, allegation of violation of laws, etc.).

As passed, the Act invalidates mandatory predispute arbitration agreements and class action waivers within the context of sexual assault or sexual harassment claims. “Predispute” refers to an agreement made at a time that precedes the claim or dispute. Courts not arbitrators are delegated the authority to determine whether a dispute qualifies as sexual assault or harassment claim. The Act is not an outright ban – it reserves for employees the option in their discretion to elect to arbitrate.

The Act applies retroactively to arbitration agreements and class waivers entered prior to the enactment date provided that the relevant claim or dispute accrues on or after March 3, 2022.

The use of mandatory arbitration provisions in sexual harassment claims was already limited under the laws of a number of states, including California, New York, New Jersey, and Washington, but these laws have been contested as preempted by the FAA. The Act’s amendment of the FAA nullifies these preemption arguments as relate to sexual assault or sexual harassment claims.

Mandatory arbitration provisions as well as class waivers provisions remain lawful under the FAA except as invalidated by the Act and are still available to employers (subject to requirements of applicable state laws) as a reasonable mechanism to manage risk associated with employee disputes outside the purview of the Act. As a practical matter, however, employers should review and/or make modifications to (optimally with guidance form counsel) any mandatory arbitration clauses and joint-action waivers in their employee agreements (nationally or on a state by state basis) as necessary to comply with the Act.

This alert was prepared by Jake Molland, a Principal at Bound Legal Strategy P.C. The content of this alert is informational only and does not constitute legal or professional advice. Please note that the law changes frequently and further that the generalized information reflected in this alert may not address the specifics of a given factual situation. Please contact Jake at jake.molland@boundlegal.com if you have specific questions or concerns relating to any of the topics covered in here.