Federal law bars mandatory arbitration, class waiver of sexual harassment/assault claims

The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 (the Act), H.R. 4445, was signed into law on March 3, 2022. The Act amends the Federal Arbitration Act (FAA) to give employees who are parties to arbitration agreements with their employers the option of bringing their claims of sexual assault or sexual harassment in either arbitration or court.

Key provisions. The new legislation adds a section to the FAA which provides,

[A]t the election of the person alleging conduct constituting a sexual harassment dispute or a sexual assault dispute, or the named representative of a class or in a collective action alleging such conduct, no predispute arbitration agreement or predispute joint-action waiver shall be valid or enforceable with respect to a case which is filed under Federal, Tribal, or State law and relates to the sexual assault dispute or the sexual harassment dispute.

“Sexual assault dispute” is defined as “a dispute involving a nonconsensual sexual act or sexual contact.” “Sexual harassment dispute” is defined as “a dispute relating to conduct that is alleged to constitute sexual harassment under applicable Federal, Tribal, or State law.” The Act defines joint-action waiver as an agreement, whether or not part of an arbitration agreement, that would prohibit or waive the right of a party to the agreement to participate in a joint, class, or collective action in a judicial, arbitral, administrative, or other forum.

The Act further provides that the validity or enforceability of an agreement will be determined by a court rather than an arbitrator, despite the existence of a contractual term to the contrary. Finally, the Act states that it shall apply with respect to any dispute or claim that “arises or accrues” on or after the date of the Act’s enactment.

Background. The FAA provides that written agreements to arbitrate are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” In its landmark 2018 decision in Epic Systems Corp. v. Lewis, the U.S. Supreme Court reaffirmed that the FAA requires enforcement of arbitration agreements, including those with class action waivers, in accordance with their terms.

In response to Epic Systems and the #MeToo movement, several states enacted or proposed legislation curbing the use of arbitration agreements for sexual harassment claims, with some legislation expanding to other types of employment claims. Employers have successfully challenged these laws in court, arguing that the state laws conflict with the FAA as to arbitration agreements governed by the federal law.

However, as a result of the passage of the Act, the FAA will no longer preempt state #MeToo laws barring mandatory arbitration of sexual assault and sexual harassment claims.

Bottom line. Employers with arbitration agreements should expect to defend more sexual assault and sexual harassment claims in court, rather than arbitration, following enactment of The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act.

Q&A: Understanding the new arbitration law

Jackson Lewis attorneys address several critical questions about the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act and its ramifications:

What types of claims are affected? As enacted, the Act applies only to “a case which is filed under Federal, Tribal, or State law and relates to the sexual assault and sexual harassment claims.” This means that otherwise valid arbitration agreements remain valid and enforceable with respect to other types of claims, such as discrimination claims, Equal Pay Act claims, and even wage and hour claims. That said, we anticipate litigation over the scope of the law, particularly where sex assault or sex harassment claims accompany other claims, such as wage and hour class and collective claims. While legislative history supports the Act’s application to sexual assault and sexual harassment claims only, plaintiffs’ counsel may bring novel arguments before the courts in an effort to evade arbitration agreements and class waivers.

What doesn’t the Act affect? Except as discussed above regarding cases with arbitrable and nonarbitrable claims, the Act does not apply to claims other than for sex assault or sex harassment. It also does not affect post-dispute agreements to arbitrate, jury waivers, predispute mediation provisions, or existing claims in court or arbitration.

What if a claim arose prior to the enactment of the Act? The Act applies to invalidate arbitration agreements and class or collective action waivers with respect to any sexual assault and sexual harassment claim “that arises or accrues on or after the date of enactment [March 3, 2022].” Therefore, regardless of the date of the agreement at issue, the Act does not affect claims that arose or accrued before March 3, 2022. However, the issue of when a claim has “accrued” likely will be disputed in court.

Can employees still choose to arbitrate? Yes. Employees who are parties to an arbitration agreement may choose whether to pursue their sexual assault and sexual harassment claims in arbitration or court. While arbitration is not entirely confidential, it is inherently more confidential than litigation in court because of the absence of a public record. Therefore, employees who are parties to arbitration agreements may opt to choose the more confidential forum. The new law makes clear that, with respect to sexual assault and sexual harassment claims, it is up to the employee, not the employer, regardless of what an arbitration agreement says.

Although contrary to the intent of the Act, some claimants may try to pursue multi-party arbitrations by invoking the arbitration agreement (at their election) and repudiating the joint action waiver (also at their election).

Who will decide arbitrability? When an employee files a sexual assault or sexual harassment claim, a court, rather than an arbitrator, will decide whether claims are subject to arbitration under the Act, including cases filed on a classwide basis. This is true even if the arbitration agreement expressly provides that an arbitrator will make that determination.

Are class action waivers in sexual assault and harassment cases invalid? At the election of the employee, if the asserted claims fall within the Act’s definition of sexual harassment or sexual assault, the class action waiver would not be enforceable. Employers facing a putative sexual assault or harassment class action will need to rely on the usual defenses to class certification, such as a lack of commonality or typicality between the class representative’s claims and those of the remainder of the potential class.

Class action waivers as to other types of claims should remain valid pursuant to the Supreme Court’s decision in Epic Systems. However, the plaintiffs’ bar may attempt to convince a court to bootstrap class or collective claims outside the purview of the statute with covered sexual assault or harassment claims.

Should existing arbitration agreements be revised? Employers maintaining arbitration agreements should review them with the assistance of counsel against federal, state, and local laws to ensure enforceability. There are several factors to consider in determining whether a revision is necessary. These include the language of the agreement itself; whether the agreement contains severability or exclusion clauses; and whether there is a clause excluding claims that may not be subject to predispute arbitration as a matter of federal law. Further, in light of the Act, it may be beneficial to expressly exclude sexual harassment and sexual assault claims from the scope of the arbitration agreement, so that claimants cannot try to bring class claims in arbitration (by electing to void the class waiver, but not the arbitration clause).

If an employer concludes that revising its arbitration agreement is the proper course of action, then the employer must address the same contractual and employee relations concerns that were at issue during the agreement’s initial rollout.

Additional legislative efforts

Will passage of the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act prompt additional legislation, with more expansive reach? Possibly. Employers should closely monitor developments in this area, as the Act likely will be used as a template for further legislative efforts to prohibit predispute arbitration agreements for other types of employment claims. However, the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act took years to pass in its current form, and its bipartisan passage is attributed largely to its narrow scope.

So far, federal bills limiting employers’ ability to mandate arbitration of other types of employment disputes have stalled in the U.S. Senate:

• The Forced Arbitration Injustice Repeal (FAIR) Act (H.R. 963) would render invalid and unenforceable any predispute agreement to arbitrate a future employment, consumer, antitrust, or civil rights dispute. However, it would allow employees and consumers to agree to arbitration after a dispute arises. Likewise, no pre-dispute joint-action waiver would be valid or enforceable as to any employment dispute, consumer dispute, antitrust dispute, or civil rights dispute — meaning that class arbitration waivers would be invalid. On March 17, 2022, the U.S. House of Representatives passed an amended version of the bill. The 222-209 vote fell along party lines with only one Republican joining Democrats in support of the legislation. Senator Richard Blumenthal (D-Conn.) has introduced the companion legislation (S. 505), which has 39 cosponsors and is in the Senate Judiciary Committee. The FAIR Act passed the House in the last Congress, but stalled in the Senate, and we expect the latest version to face a similar fate.

• The Protecting the Right to Organize (PRO) Act, legislation intended to amend federal labor law, would make it an unfair labor practice under the National Labor Relations Act for an employer to enter into agreements with employees under which employees waive the right to pursue or a join collective or class-action litigation. H.R. 842 passed the House by a 225-206 vote in March 2021. A companion measure, S. 420, has sat in the Senate Health, Education, Labor and Pensions (HELP) Committee since February 2021. However, in a May 12, 2022 press statement, Senator Patty Murray (D-Wash), HELP Committee chair, stated, “I’ll keep fighting to pass the PRO Act to help protect every worker’s right to organize.”

• The Build Back Better Act (H.R. 5376), an ambitious climate protection and social spending measure, cleared the House in November 2021. Tucked inside the massive bill was a provision that would prohibit employers from adopting class and collective action waivers by creating significant civil penalties. However, the updated bill that emerged from the Senate HELP Committee in December 2021 did not contain this provision and, in a January 2022 press conference, President Biden conceded that the legislation had stalled and was unlikely to advance in its current form.

• The latest federal bill seeking to restrict arbitration is the Employee and Retiree Access to Justice Act (S. 4219/H.R. 7740), introduced in the Senate and House on May 12, 2022. The legislation aims to bar mandatory predispute arbitration provisions and “coerced” postdispute arbitration clauses of any disputes arising under ERISA. The bill also would render unenforceable any pre- or postdispute provisions in which a plan participant or beneficiary agrees “not to pursue, bring, join, litigate, or support any kind of individual, joint, class, representative, or collective [ERISA] claim.” S. 4219 has been referred to the Senate Committee on Health, Education, Labor and Pensions.

Federal agency plaintiffs not bound

In 2014, the U.S. Supreme Court held in EEOC v. Waffle House, Inc., that the Equal Employment Opportunity Commission (EEOC) cannot be compelled to arbitrate a suit brought on behalf of employees who have signed predispute arbitration agreements. Even though the EEOC in that case sought monetary relief for the employee, the employee had no authority to control the litigation. The EEOC was not a party to the arbitration agreement and not bound by it, because the FAA “does not require parties to arbitrate when they have not agreed to do so,” the Court explained.

Applying Waffle House to an enforcement action brought by the U.S. Department of Labor (DOL), the U.S. Court of Appeals for the Ninth Circuit ruled that the secretary of labor is similarly not bound by a private arbitration agreement when bringing a Fair Labor Standards Act (FLSA) enforcement action that seeks relief on behalf of one party to the agreement against the other party to the agreement. The appeals court affirmed the district court’s denial of the defendant’s motion to compel the secretary to arbitrate based on arbitration agreements that the defendant and his companies entered into with delivery drivers whom the secretary alleged were misclassified as independent contractors rather than employees.

In addition, employers’ enforcement of arbitration agreements and other types of waivers against individuals themselves has become an EEOC focus, resulting in some of the more creative and novel cases that the agency has filed in recent years. For instance, the agency argued that certain arbitration agreements violated Title VII under a theory of resistance under Section 707 of the act. Although the agency did not have much success, it is expected to return to those types of novel arguments as it takes aim at arbitration agreements and other types of waivers.

The California landscape

In 2018, the California legislature passed Assembly Bill (AB) 51, a law that prohibits employers from implementing mandatory arbitration agreements as a condition of employment (though voluntary arbitration agreements with employees are permitted). The U.S. Chamber of Commerce filed a lawsuit challenging the law and, in 2021, a divided Ninth Circuit panel found that the FAA does not preempt AB 51 to the extent the statute seeks to regulate an employer’s conduct prior to executing an arbitration agreement.

The Chamber filed a petition for rehearing en banc, arguing that the panel decision is in conflict with U.S. Supreme Court precedent. The petition also pointed out that the decision created a split over the reach of FAA preemption, noting that the First and Fourth Circuits have held state laws that discourage, or create obstacles in forming arbitration agreements are preempted by the FAA.

Meanwhile, the Supreme Court has decided another arbitration issue specific to California addressing the arbitrability of claims under the California Private Attorneys General Act (PAGA). The qui tam-like statute empowers private citizens to enforce the Labor Code by seeking monetary relief on behalf of similarly situated employees. (See “Supreme Court takes up arbitration” at page 7.) The Ninth Circuit has deferred consideration of the Chamber’s petition challenging AB 51 until the Supreme Court rules on the PAGA case.

In the meantime, the preliminary injunction staying enforcement of AB 51 remains in effect pending a decision by the Ninth Circuit. Should the appeals court deny the Chamber’s petition, the likely next step would be a petition for review by the Supreme Court. The Chamber also may move to stay the Ninth Circuit’s decision becoming effective pending review by the Supreme Court.

Elsewhere in the courts…

Bakery delivery drivers not excluded from FAA. A divided panel of the U.S. Court of Appeals for the Second Circuit ruled that bakery delivery drivers were not excluded from coverage under the FAA as transportation workers since they were “in the bakery industry, not a transportation industry.” The appeals court noted that, although the delivery drivers spent appreciable parts of their working days moving goods from place to place by truck, their customers (stores and restaurants) were not buying the movement of the baked goods; rather, the bakery charged them for the baked goods themselves. Accordingly, the district court appropriately compelled arbitration under an arbitration agreement.

Arbitration agreements foreclosed notice to opt-in plaintiffs. In a FLSA putative collective action brought by exotic dancers asserting that a gentlemen’s club misclassified them as independent contractors, a divided panel of the U.S. Court of Appeals for the Fifth Circuit held that the district court “clearly and undisputedly erred” in approving notice to potential opt-in plaintiffs who had signed arbitration agreements that would have prevented them from participating in the collective action. Citing a 2019 Fifth Circuit opinion that barred the sending of notices to employees with valid arbitration agreements “unless the record shows that nothing in the agreement would prohibit that employee from participating in the collective action,” the court concluded that the dancers’ clear agreement to submit all disputes (including FLSA claims) to individual arbitration foreclosed their involvement in a collective action even though the agreement’s class action waiver did not mention “collectives.” Accordingly, the appeals court granted the employer’s writ of mandamus asking that it vacate the district court’s order certifying the collective action.

Rideshare company denied bid to arbitrate PAGA claims. A California appeals court denied a rideshare company’s motion to compel arbitration of a driver’s putative class action asserting the company misclassified its drivers as independent contractors and failed to reimburse them for necessary work expenses. Rejecting the employer’s reliance on pre-employment arbitration agreements signed by its drivers, the California appeals court held in an unpublished opinion that a PAGA claim is brought on behalf of the state, and thus is not subject to any arbitration agreement between the employee and the employer. In addition, the initial issue of whether the driver could pursue his claim under PAGA as an aggrieved employee must be decided by the trial court, not an arbitrator.

Scott Jang, Samia Kirmani, Linda O'Brien, and Marjorie Johnson also contributed to this article.