Financial services firms—which commonly have agreements and policies mandating arbitration for discrimination and harassment claims—should take stock of recent developments regarding mandatory arbitration. State legislative enactments prohibiting the use of mandatory arbitration with employees continue to roll out as legislatures face pressure from their constituents. The pressure is also erupting in recent headlines, which put a spotlight on mandatory arbitration clauses. Employers, ranging from global law firms to Fortune 500 companies, have received a loud outcry over their use of mandatory arbitration provisions. Arguments against the use of mandatory arbitration provisions have now even made their way into the Presidential debates. Undoubtedly, in light of pressure from employees, scrutiny from the public, and the increasing litany of statutory prohibitions, some employers—such as Google, Uber (for sexual misconduct claims), and Microsoft (for gender discrimination and harassment)—are eliminating or reducing mandatory arbitration of discrimination claims.

The number of states imposing limitations on mandatory pre-dispute arbitration agreements in the employment context has been increasing and includes Illinois, New Jersey, New York, Washington, Vermont, and Maryland. The types of limitations vary by state. For example, Vermont’s law applies only to claims of sexual harassment, while others, such as New York’s, purport to prohibit required arbitration of all claims of discrimination or harassment based on any protected characteristic.

To add even more complexity to the landscape of mandatory arbitration, preemption challenges may narrow the scope of these state limitations, given potential conflicts with the Federal Arbitration Act (“FAA”). In June of this year, for example, a New York federal court held that the FAA preempted New York’s prohibition on mandatory arbitration provisions covering sexual harassment claims. We expect similar challenges to arise in state courts and in other states where limitations have been enacted.

In light of the new laws and the increasingly vocal public outcry, employers should review their arbitration provisions, whether in employment agreements, offer letters, standards of conduct, or other employment-related documents. Not only should employers review these provisions for compliance with the evolving laws, but they should consider the pros and cons of arbitration programs and how mandatory arbitration fits into the current employment culture. This may require employers to revise their agreements, create carve outs, and implement new practices, particularly in cases where an employee did not sign, but is otherwise bound by, arbitration agreements.

*Eduardo J. Quiroga, a Law Clerk – Admission Pending (not admitted to the practice of law) in the firm’s New York office, contributed to the preparation of this Take 5 article.