Supreme Court Rules that Companies can Use Arbitration Clauses in Employee Contracts

Late Last month, the Supreme Court issued a ruling on the use of arbitration clauses in employment contracts that could have a significant impact on employee rights across the country. 

The Issue  

A few weeks ago, the Supreme Court released a ruling on an issue that goes to the heart of many employment-related legal disputes. Basically, the Court was asked to address the question of whether employers are permitted to use arbitration clauses in their employment contracts, even when doing so essentially prohibits employees from joining together to take legal action over workplace violations.

The case involved the consolidation of three different lawsuits, each of which concerned charges that employers were underpaying their employees. In all three cases, the employees’ employment contracts required employees to resolve these types of disputes in the more informal setting of arbitration rather than in court and to file wage and hour claims one at a time. The plaintiffs argued that these restrictions violated their rights under the National Labor Relations Act (NLRA), which gives employees the right to file class action lawsuits against their employers. Concerns were also raised that:

• Requiring arbitration would discourage individual employees from filing claims, as it is both more expensive and more intimidating to file a suit individually;
• Because arbitration proceedings are often kept confidential, employers would find it easier to keep systemic misconduct hidden from public scrutiny;
• Requiring arbitration in wage disputes could also make it more difficult to file claims based on other workplace complaints, such as sexual harassment and discrimination; and
• An arbitration-only policy would leave employees vulnerable to retaliation by employers.

Business groups countered these claims by arguing that one-on-one arbitration is a more efficient way to resolve legal disputes and also deters the filing of frivolous claims. The defense also pointed to the Federal Arbitration Act, which was signed in 1925 and effectively made arbitration clauses valid and enforceable. According to the defense, although this law was originally intended to apply only to commercial disputes, its scope has been expanded over the last decades by a number of federal courts, who have determined that the statute covers both consumers and employees.

The Court’s Opinion  

Ultimately, and despite a vociferous dissent, the Court ruled in a 5-4 opinion, that employers are allowed to use arbitration clauses in employment contracts to prohibit employees from banding together over workplace violation claims. In reaching its decision, the justices pointed to federal law and legal precedent, which have historically favored arbitration, and also stated that the NLRA, which, although it does give employees the right to join with other workers for their own protection, does not invalidate class action waivers voluntarily entered into by employees. It is estimated that the court’s decision could affect as many as 25 million employment contracts nationwide.