Drawbacks of mandatory arbitration agreements 

By: Saman Aslam

Growing number of employers utilize mandatory arbitration agreements in employment contracts because it provides numerous benefits.[1]  The various benefits of arbitration include: no juries, private and confidential proceedings, it is less expensive than litigation, and the proceedings are more streamlined and efficient.[2]  However, recent case law,[3] the policy choices of the federal government,[4] and the state laws[5] passed against the enforcement of arbitration agreements are significant drawbacks employers should consider in their risk assessment of employing mandatory arbitration agreements. 

One disadvantage of mandatory arbitration agreements is that when an arbitrator makes a legal mistake the arbitration process provides no grounds for an appeal.[6]  The basis to review an arbitration decision in court are very limited mostly involving misconduct by the arbitrator.[7]  Therefore, such challenges are often unsuccessful.[8]  In Warfield v. Icon Advisers, Inc., James Warfield, a securities broker of North Carolina brought suit against his former employer, Icon Advisers, Inc.[9]  Warfield contented his former employer terminated him without cause.[10]  Both parties pursued to resolve their dispute through an arbitration panel within the Financial Industry Regulatory Authority.[11]  Warfield argued that given the fact the dispute had to be resolved by arbitration it implied he could only be terminated for cause.[12]  The arbitration panel agreed with the employee and without providing an explanation held the employer liable for about $1.2 million in compensatory damages.[13]  

The district court vacated the decision by the arbitration panel and held that North Carolina is an at-will employment jurisdiction.[14]  At-will employment means both the employer and the employee can cease the employment relationship for any reason without notice or cause.[15]  The court determined that the arbitration panel’s decision demonstrated manifest disregard of the law when a for-cause provision was implied into a private employment contract which explicitly provided for at-will employment.[16]

On appeal, the Fourth Circuit applied a high standard in reversing an arbitration panel’s decision.[17]  In order to establish manifest disregard of the law the party must show both that the disputed legal principle is clearly defined and not subject to debate and that the arbitrator refused to apply that legal principle.[18]  The Fourth Circuit also took into account that other circuit courts specifically the Seventh[19] and Eighth[20] Circuits have found the existence of arbitration agreements to imply protections from being terminated without cause.[21]  Given the fact that courts disagree on this legal question the Fourth Circuit concluded that this weighed against second guessing the arbitrator’s award and determined that the employer failed to establish that arbitrators manifestly disregarded the law.[22]  Therefore, the district court’s decision was reversed and the employee’s $1.2 million award was reinstated.[23]  This case demonstrates the risk involved in employers use of mandatory arbitration agreements that have the potential to change their at-will employment relationship with their employees.[24]  Further, this decision points to the limited opportunity available for the review of an adverse decision.[25]

Moreover, on March 3, President Joe Biden signed into law the “Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021” after it was successfully passed by both chambers of Congress.[26]  The federal government is following this trend of moving away from mandatory arbitration agreements demonstrated by the recent policy choices exhibited by federal agencies. On March 21, 2022, the acting Solicitor of Labor Seema Nanda, Department of Labor’s (hereinafter “DOL”) Chief legal officer filed an amicus brief at the National Labor Relations Board (hereinafter “NLRB”).[27]  DOL supported NLRB’s initiative to revisit Trump-era precedent on whether employers violate federal labor law by permitting mandatory arbitration agreements that prohibit workers from discussing the policies with their colleagues.[28]  DOL asserted that the confidentiality requirements of mandatory arbitration agreements prevent the enforcement of worker protection laws.[29]  Ms. Nanda proclaimed “[DOL] considers confidentiality agreements a direct threat to its ability to effectively enforce the country’s workplace protection laws.”[30] Consequently, workers subject to these mandatory arbitration agreements are reluctant to report violations and publicly hold their employers accountable.[31]  Further, Ms. Nanda highlighted the disadvantages of mandatory arbitration agreements by stating “forced arbitration, operate to silence workers and chill complaints, cooperation with government agencies like DOL, and collective action.”[32]  

Moreover, several states such as New York, California, Illinois, Maryland, New Jersey, Vermont, and Washington have enacted employee friendly legislation prohibiting enforcement of mandatory arbitration agreements specifically in the areas of discrimination, retaliation, and sexual harassment.[33]  The state of Washington moved one step forward on March 24, 2022, by enacting the Washington’s Silenced No More Act.[34]  Under this law it will be unlawful for employers to require or even request that workers sign non-disclosure agreements in other words mandatory arbitration agreements that limit their ability to publicly hold their employers liable for violations of public policy such as illegal discrimination, harassment, retaliation, and wage and hour violations.[35]

Overall, the trend evident from case law[36], federal administration[37], and state law[38] is to move away from and prohibit mandatory arbitration agreements therefore employers should consider the risks associated with them prior to utilizing them.

[1] See Alexander J.S. Colvin, The growing use of mandatory arbitration, Econ. Pol’y Inst. (Apr. 6, 2018), https://www.epi.org/publication/the-growing-use-of-mandatory-arbitration-access-to-the-courts-is-now-barred-for-more-than-60-million-american-workers/.

[2] See Jay StarkmanPros and cons of arbitration agreements for employers, The Bus. Journals (Oct. 25, 2015), https://www.bizjournals.com/bizjournals/how-to/growth-strategies/2015/10/pros-and-cons-of-arbitration-agreements.html.

[3] See Warfield v. ICON Advisers, Inc., 2022 U.S. App. LEXIS 5066, at *1 (4th Cir. Feb. 24, 2022).

[4] See Jon SteingartDOL Takes Rare Step In Prodding NLRB On Worker Arbitration, Law360 (Apr. 1, 2022), https://www-law360-com.ezproxy.hofstra.edu/employment-authority/articles/1479314/dol-takes-rare-step-in-prodding-nlrb-on-worker-arbitration.

[5] See Alan Kabat & Samuel FinnCongress Must Act To Curb Workplace Arbitration Pacts, Law360 (Aug. 11, 2021), https://www-law360-com.ezproxy.hofstra.edu/articles/1411320/congress-must-act-to-curb-workplace-arbitration-pacts.

[6] See Risk & Compliance: Pros and Cons of Mandatory Arbitration Provisions, Net Assets (Nov. 28, 2018), https://www.netassets.org/blogs/net-assets/2018/11/28/risk-compliance-pros-and-cons-of-mandatory-arbitra#:~:text=Potential%20Downsides%20to%20Arbitration&text=The%20arbitration%20process%20provides%20virtually,more%20limited%20in%20arbitration%20proceedings.

[7] See Starkman, supra note 2.

[8] Id.

[9] See Warfield v. ICON Advisers, Inc., 2022 U.S. App. LEXIS 5066, at *1.

[10] Id.

[11] Id. at 2.

[12] Id.

[13] Id. at 3.

[14] Id. at 2.

[15] Id

[16] Id. at 3.

[17] Id.

[18] See Jones v. Dancel, 792 F.3d 395, 402 (4th Cir. 2015).

[19] See Shearson Hayden Stone, Inc. v. Liang, 653 F.2d 310, 312 (7th Cir 2015).

[20] See Painewebber, Inc. v. Agron, 49 F.3d 347, 352 (8th Cir 2015).

[21] See Warfield v. ICON Advisers, Inc., 2022 U.S. App. LEXIS 5066, at *5-6.

[22] Id. at 6.

[23] Id. at 14.

[24] See Miles & Stockbridge P.C. & Brianna Gaddy, Fourth Circuit’s Reinstatement of $1.2 Million Award Highlights Risk of Arbitration Agreements, Jd Supra (Mar. 30, 2022), https://www.jdsupra.com/legalnews/fourth-circuit-s-reinstatement-of-1-2-5716792/.

[25] Id.

[26] See Mark S. Goldstein et al., Biden signs federal law restricting sexual harassment and assault arbitration, Empl’t Law Watch (March 13, 2022), https://www.employmentlawwatch.com/2022/03/articles/us-alert/biden-signs-federal-law-restricting-sexual-harassment-and-assault-arbitration/; Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021, 117 Bill Tracking H. R. 4445.

[27] See Jon Steingart, supra note 4.

[28] See Kevin Stawicki, NLRB Looks To Revisit Precedent On Mandatory Arbitration, Law360 (Jan. 18, 2022), https://www-law360-com.ezproxy.hofstra.edu/employment-authority/articles/1456473.

[29] Id.

[30] Brief for the Secretary of Labor as Amicus Curiae Supporting NLRB at 1, 18, Ralphs Grocery Co. v. NLRB, No. 16-71422 (Mar. 21, 2022).

[31] Id.

[32] Id.

[33] See Kabat, supra note 5.

[34] See Hannah Albarazi, One By One, States Are Banning NDAs To Protect Workers, Law360 (Apr. 1, 2022), https://www-law360-com.ezproxy.hofstra.edu/employment-authority/articles/1476428/one-by-one-states-are-banning-ndas-to-protect-workers.

[35] Id.

[36] See Warfield v. ICON Advisers, Inc., 2022 U.S. App. LEXIS 5066, at *1.

[37] See Steingart, supra note 4.

[38] See Kabat, supra note 5. 

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