Big Business Restricted from Mandatory Arbitration

On July 31, 2014, President Obama signed the “Fair Pay and Safe Workplaces Executive Order.” The order was inspired by previous legislation passed by Congress in 2010, which was in response to an attempted suit by a woman who was gang-raped while working in Iraq for a defense contractor. However, the woman was prevented from actually filing suit because she signed a mandatory arbitration agreement before the rape occurred.

This new law restricts companies with more than one million dollars in federal contracts from entering into mandatory arbitration agreements for disputes relating to sexual assaults or harassment. These two violations are actionable pursuant to both tort law and Title VII of the Civil Rights Act. The effect on modern employment law because of this order may be limited due to the confines of the offenses. However, significant debates within the field have already begun to emerge. Many legal experts predict that challenges will surface in the near future. A fear that companies have expressed is that the law will encourage frivolous lawsuits, which may force a business into bankruptcy.

One such challenge may be based on the theory that the new order conflicts with the Federal Arbitration Act (FAA). The FAA was passed in 1925 and provides for binding arbitration, as opposed to a judgment by a court of law. Unfortunately, it usually favors the defendant (often the corporation) and the plaintiff gives up the right to any appeal. Additionally, any state law that opposes the FAA is preempted by federal law and held invalid.

As a result, there is nothing the states can do to invalidate an arbitration agreement the employee signed, even if the employee is unaware they signed it. The U.S. Supreme Court cases upholding arbitration agreements (and usually sympathetic to the FAA) have only been applied to private employment contracts. It has yet to be expanded to a holding for federal employment contracts.

It is important to note that there is a provision in the Obama executive order that allows the parties to agree to arbitration after the dispute arises, but not before. Big business critics claim that this provision was included to weaken the argument that the order violates the FAA. However, it is usually against the plaintiff’s interest to submit to arbitration after the dispute arises. Therefore, the ban would likely remain throughout the case to the disadvantage of the business sued.

The fear from these corporations and other entites is that employment defense attorneys may circumvent the order by including other clause, such as a mandatory agreement to waive a jury trial. This kind of agreement will essentially achieve the same result as a mandatory arbitration agreement while still conforming to the law.

Additional provisions of the order include a requirement of disclosure of past violations by the company, a requirement that employers provide documentation to the employee of hours worked and any overtime or deductions from their pay.

The new order is a victory for plaintiffs who seek to be compensated for egregious violations in the work-place. Many employees are unaware that they even signed oppressive arbitration agreements and they are now barred from receiving their day in court. Although the order is not retroactive, it may force these companies to take preventative measures and offer more protection against sexual assault or harassment in the workplace.

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