On March 3, President Biden signed into law the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021. The bill adds a new Chapter 4 to the Federal Arbitration Act (FAA), a law passed in 1925 to ensure that courts would enforce arbitration agreements contained in maritime contracts or other contracts “evidencing a transaction involving commerce.” Despite this narrow language, the Supreme Court has held that the FAA applies to all employment contracts, which means that employees may be forced to arbitrate discrimination and harassment claims. The new law provides an employee with the option to file a sexual harassment or assault claim in court even if the individual entered into an arbitration agreement before the harassment or assault occurred. This is a positive change for employees, as courts often offer greater protections than forced arbitration designed by the employer.

What is Arbitration and How Does it Impact Employees’ Rights?

When two parties have a legal dispute, they can choose to resolve it through arbitration instead of a lawsuit in court. Arbitration is a private process in which one or more neutral third-parties hear both sides of the dispute and decide the outcome, much like a judge does. The parties agree via contract that they will abide by the arbitrator’s decision, so the outcome is binding even though arbitrators are not active judges and therefore do not have any authority to enforce their decisions the way courts do as a branch of the government. While parties may decide after a dispute arises that they wish to resolve it through arbitration, pre-dispute arbitration agreements are also common in various types of contracts. These provisions say, essentially, “If in the future we have a dispute about something relating to this contract, we agree to resolve it through arbitration, and we waive our rights to resolve it in court.”

In the early 1900s, merchants were frustrated by the U.S. court system, which they saw as slow, not up-to-date with the evolving business community, and unpredictable, as there were no federal procedural rules yet.^[1] It was already common for merchants and businesses to agree to arbitrate their contractual disputes, which allowed them to choose an industry insider with relevant expertise to quickly decide a matter. However, one party would sometimes file a breach of contract case in court rather than abiding by the arbitration agreement, and judges often chose to hear the case rather than enforcing the arbitration agreement. This led to Congress’ passage of the FAA, which required courts to dismiss certain cases that were governed by valid arbitration agreements.

Although the FAA was designed to cover commercial contract disputes (as indicated by the language applying it to contracts “evidencing a transaction involving commerce”), the Supreme Court has broadly interpreted it to require arbitration of any dispute arising from a consumer or employment contract which contains an arbitration provision. In 1991 the Supreme Court decided that a worker whose individual employment contract contained an arbitration provision was bound by that provision and could not bring an employment discrimination claim in court. Following that decision, the number of private, non-union^[2] workers in the US bound by arbitration agreements skyrocketed, from 2% in 1992 to 56% in 2017. Also in 2017, 23% of non-union employees in the private sector were also bound by class-action waivers, preventing employees from combining their resources into a single action in the case of widespread employer misconduct. Most employment arbitration provisions are contained in application forms, employee contracts, or handbooks, although some employers have imposed arbitration “agreements” on employees after they began work, for example by emailing all staff that the company is instituting a mandatory arbitration program and that an employee must opt out within 30 days or waive the right to sue the employer in court.

The private nature of arbitration offers some benefits, but some features of the process that appear appealing are often detrimental to employees in practice. For example, arbitration is not governed by state or federal rules of evidence and procedure that apply in court—the rules which determine what evidence can be presented at trial, how that evidence can be obtained, and more. This means that the parties can choose rules that best fit their case and limit the time and expense often spent sorting through mounds of evidence in court discovery. However, in situations where one party writes the arbitration agreement and the other party has no power to negotiate its terms, the more powerful party can include rules that benefit it. For example, employees often have no power to negotiate the terms of their employment agreement—they can accept the terms or find a different job. An employer can therefore include an arbitration provision in an employment agreement that significantly limits the amount of time the parties have to request evidence from each other in arbitration, the number of requests they can make, and so on. Because employers typically already have the majority of relevant evidence and information in employer-employee disputes—think personnel files, notes from internal investigations, access to witnesses who still work at the company—truncating discovery has little impact on the employer’s access to relevant information. Employees, on the other hand, face significant challenges in proving their cases if discovery is limited. Arbitrators also have more freedom than judges to interpret laws according to their own reading of the statute because, unless the parties agree otherwise, arbitrators are not required to follow prior judicial interpretations of the relevant law. This latitude theoretically may benefit either party, but it leads to unpredictability that makes it difficult for an employee or her counsel to assess the risks of initiating arbitration.

Another potential benefit of arbitration is that the parties can choose their arbitrator, whereas judges are assigned to cases filed in court. Parties can therefore select an arbitrator who has expertise in the subject matter of the case. This reduces the time and resources parties must spend educating the decision-maker about potentially complex or obscure issues. However, where one party has disproportionate control over choosing the arbitrator, that party can choose an individual they believe will be more favorable to them. Because employers draft arbitration provisions, they can exercise control over how an arbitrator is chosen. Employers are also more likely to be familiar with the various arbitrators and how they decide cases. Unlike lawsuits in court, arbitrations are private proceedings and the arbitrator’s decision is not published. Arbitrators are not always required to give any explanation of how they reached their decision to the parties, much less to the public. This makes it very difficult for an employee who has never been through arbitration to learn anything about what a given arbitrator will find important or how she will decide a case. Employers are much more likely to have multiple cases with the same arbitrator over time, and therefore gain information that will help them win cases with that arbitrator in the future.

The evidence also suggests that the parties’ ability to select arbitrators can skew the results of the proceedings. Unlike judges who are assigned to cases and paid a salary by the government, arbitrators are selected and paid directly by the parties. In any given employment dispute, the employer is more likely than the employee to require arbitration services in the future. An arbitrator thus has a financial interest in delivering favorable decisions to employers. While most arbitrators seek to avoid letting this personal interest impact their decision-making, there is statistical evidence to show that the various factors discussed above give a significant advantage to repeat players in arbitration. One study of nearly 3,000 employment cases decided by the American Arbitration Association between 2003 and 2013 found that the first time an arbitrator decided a case involving a particular employer, the employer had an 82% chance of winning, and where the employer lost, the average award to the employee was $130,184. Each additional time the same arbitrator and employer were paired, the worker’s chance of winning decreased by 6.2% and the successful worker’s award decreased by 8.6%. A different study which compared the outcome of employment cases brought in arbitration or federal court in the early 2000s found that employers won 79% of arbitration cases and 64% of court cases, while the average award to a victorious worker in arbitration was $109,858 and in court was $394,223.

The fact that arbitrators’ decisions are not made public not only inhibits awareness of arbitrators’ records, but it also prevents employees from knowing anything about other complaints against their employer or other employers in their region or industry. The lack of transparency allows an employer to isolate and resolve individual complaints that may arise from a toxic culture or a repeat offender, such as a serial sexual harasser. Additionally, arbitration decisions do not contribute to the development of legal rules and principles governing employers’ treatment of employees, or of their liability for violation of laws that prohibit discrimination, harassment, and retaliation. Private arbitration thus sends no “messages” to other employers about the risks of violating laws designed to protect employees.

What Does the New Law Change?

In recommending the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act to the House of Representatives, the House Judiciary Committee noted many of the issues discussed above: the ubiquity of arbitration provisions in employment contracts offered on a take-it-or-leave-it basis; the lack of judicial precedent to constrain arbitrators’ interpretation of the law; the benefits employers gain as repeat players in the arbitration system; the manipulation of procedural and evidentiary rules to benefit business interests; and the confidential nature of the proceedings and decisions, which prevent the public from knowing whether arbitrators are properly enforcing the law with their decisions, or even that the dispute ever existed. This means that many different individuals may accuse the same defendant of the same wrongdoing, but all accusations are hidden from the public—and from other employees who may be at risk of the same mistreatment. The public reckoning with the fact that powerful men were able to harass numerous women over extended time periods by silencing each individual through confidential arbitration or non-disclosure agreements was a major impetus for this law’s first introduction in Congress in 2017^.[3]   

The final version of the bill that became law earlier this month gives employees (and consumers^[4]) who allege that they were sexually harassed or sexually assaulted at work (or as a patient or customer) the right to bring their claims in court even if they have signed a contract with the business that contains a mandatory arbitration provision. The main provision of the law states:

Notwithstanding any other provision of this title, at the election of the person alleging conduct constituting a sexual harassment dispute or 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.

Let’s break that down.

“Notwithstanding any other provision of this title…” means that if a case falls under this new law, the other sections of the FAA which would require courts to enforce the arbitration agreement do not apply.

“…at the election of the person alleging conduct constituting a sexual harassment dispute or sexual assault dispute, or the named representative of a class or in a collective action alleging such conduct…” means that the plaintiff—the person who says they were sexually harassed or assaulted and is now filing a lawsuit—gets to decide whether they would like the pre-dispute arbitration provision to apply or not. Although courts will sometimes allow a sexual assault plaintiff to remain anonymous to the public, some individuals who have been harassed or assaulted prefer the confidentiality of arbitration over the publicity of litigation when dealing with their sensitive personal stories. Individuals may also prefer the speed of arbitration so that they do not have to continually relive the trauma for years in litigation,^[5] or may be familiar with arbitration and choose it for another reason. The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act gives the individuals who claim they have suffered wrongdoing, and who likely had no choice in agreeing to the arbitration provision in the first place, the power to choose freely whether to vindicate their legal rights in court or arbitration.

This provision also specifies that the law only applies to plaintiffs alleging “conduct constituting a sexual harassment dispute or sexual assault dispute.” Elsewhere in the statute, “sexual harassment dispute” is defined to be a dispute in which the individual alleges conduct that constitutes sexual harassment under applicable federal, state, or tribal law. This is important because in order for conduct to qualify as sexual harassment under federal law, it must be severe or pervasive, a high bar to meet. Several states have lower standards which encompass a broader range of conduct. By defining “sexual harassment” as it is defined in the applicable state law, individuals in states with broader definitions of sexual harassment will still be covered by this law and have the option to bring their claims in court. Similarly, “sexual assault dispute” is defined by reference to the federal definition of a nonconsensual sexual act or contact, “or similar applicable Tribal or State law.”

“…no predispute arbitration agreement or predispute joint-action waiver shall be valid or enforceable…” means that the law applies to any agreement that was entered into before the wrongdoing occurred. The law is designed to protect employees who had no choice but to accept a mandatory arbitration agreement in order to secure a job (and consumers who have to accept terms and conditions in order to obtain a product or service), and who often do not know that the arbitration provision exists or what it means. If an employee is sexually harassed or assaulted at work, and then signs a contract with the employer to resolve the particular dispute in individual arbitration, the employee cannot use the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act to revoke that agreement later. The inclusion of predispute joint action waivers means that in cases where a number of employees or consumers have similar claims against the same business, they can bring a class action lawsuit rather than being forced to litigate each claim separately, if they can satisfy the requirements for class actions.

“…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.” This clause reiterates that the law applies to cases brought under federal, state, or tribal law, but is limited to cases alleging sexual assault or harassment. The phrasing “a case which…relates to the sexual assault dispute or the sexual harassment dispute” is likely to raise some questions. Many employment discrimination cases involve more than one type of claim. For example, what if a supervisor harasses an employee because of her race and sex?  If that employee’s contract contains an arbitration provision, she can clearly file a claim for sexual harassment in court, but can she also file the racial harassment claim along with it, in a single case which relates to the sexual harassment?  Or could the employer compel her to arbitrate the race claim while litigating the sex claim?  What if an employee brings a sexual harassment claim in court, and the employer makes a counterclaim against the employee for defamation, alleging that the plaintiff has been spreading lies in the community about the company’s work environment? Can the employer bring the counterclaim in court because the employee has opted to waive the arbitration agreement for this case which “relates to” sexual harassment, or is the employer’s counterclaim bound by the arbitration agreement because the employer is not alleging conduct that constitutes sexual harassment or assault? Although courts have often been willing to allow arbitrators to decide whether an arbitration agreement applies to a particular case, the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act specifies that any such question about whether the law applies will be decided by a judge, not an arbitrator.

Finally, the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act applies to any claim that arises on or after March 3, 2022, the day it was signed into law. This means that regardless of when the arbitration agreement was signed or otherwise became effective, if the sexual harassment or assault occurred on or after March 3, the law against forced arbitration applies.

What Issues Remain?

As the House Judiciary Committee noted, the FAA was intended to allow businesses to settle their contractual disputes in arbitration that they mutually agreed to—not to force unknowing employees into arbitration when their statutory rights are violated. The FAA was passed when employment arbitration was almost unheard of and the Supreme Court was striking down such basic worker protection laws as minimum wage requirements and child labor laws as unconstitutional. A federal minimum wage and ban on child labor would not stick until 1938 when Congress passed the Fair Labor Standards Act, 13 years after the FAA passed. The federal government would not begin banning discrimination in employment until the 1960s, when Congress passed the Equal Pay Act of 1963, Title VII of the Civil Rights Act of 1964, and The Age Discrimination in Employment Act of 1967. The vast expansion of mandatory arbitration provisions in employment over the past 30 years has made it more difficult for workers to enjoy the protections that Congress has provided since the FAA passed.

Recognizing the growth of mandatory arbitration provisions in employment contracts and the risk of harm to both employees and the public if whistleblower retaliation claims are forced into confidential arbitration, Congress has included or added provisions invalidating predispute arbitration agreements for cases under 5 of the 25 whistleblower retaliation laws that OSHA enforces since 2010^.[6] Other laws that were passed before mandatory arbitration agreements became standard in employment contracts need to be updated as well. Some states, such as New York and California, recently passed laws invalidating mandatory arbitration agreements that are signed after the law went into effect, with respect to employment discrimination claims more broadly. However, some courts have determined that the FAA preempts these state laws, and have compelled plaintiffs to resolve their employment discrimination claims through arbitration. Congress must pass broader exceptions to the FAA, such as the FAIR Act (which the House passed on March 17, 2022), to protect all employees’ right to their day in court under state, tribal, and federal law, and to ensure that the FAA is limited to its original purpose of enforcing actual agreements between businesses, or post-dispute agreements between employers and employees, and not of providing employers a tool to unilaterally keep their employees out of court.

[1] When the FAA was passed there were state rules of procedure and evidence, but the Federal Rules of Civil Procedure (1938), Criminal Procedure (1944), and Evidence (1975) did not exist yet.

[2] Unionized employees for many years were allowed to bring employment claims in court even when their collective bargaining agreements provided for mandatory arbitration. But in 2009, the Supreme Court held that union workers could also be limited to pursuing claims in arbitration if their CBAs included such a provision.

[3] These concerns have also led to efforts to enact broader prohibitions on mandatory pre-dispute arbitration, such as the Forced Arbitration Injustice Repeal Act (FAIR) introduced in 2018, 2019, and 2021. The National Employment Lawyers Association (NELA) vigorously endorsed this legislation, and cited all of the concerns identified above as a reason to end forced arbitration of all employment and consumer disputes.

[4] Consumer dispute arbitration faces many of the same issues that arise in the employment context. Sexual harassment and assault can occur in service contexts, where consumers often check a box agreeing to terms and conditions when purchasing services but do not read the terms and know that they contain an arbitration provision. For example, a disturbing number of women who claimed they were sexually assaulted by massage therapists at Massage Envy were kept out of court by arbitration provisions they “agreed” to online or through the company’s app.

[5] One study found that the average employment dispute takes about one year from filing to hearing in arbitration but about twice as long in federal court. Overburdened trial judges may take months to reach a decision in the case, and the losing party can then appeal the case, which can make it drag on for years more. Arbitration decisions cannot be appealed, and can only be reviewed by courts for limited purposes such as enforcing the agreement, meaning the case is generally over as soon as the arbitrator issues a decision.

[6] Those laws are the Anti-Money Laundering Act of 2020, Consumer Financial Protection Act of 2010, Pipeline Safety and Improvement Act of 2002 (arbitration provision added in 2020), Sarbanes Oxley Act of 2002 (arbitration provision added in 2010), and the Taxpayer First Act of 2019.