Earlier this year, the United States Supreme Court held in Epic Systems Corp. v. Lewis that employers can require employees to agree to arbitrate disputes between them solely on an individual basis and to waive class and collective action litigation procedures without running afoul of federal law.  (See our post here).   Addressing an issue not explicitly discussed in Epic, the Kentucky Supreme Court recently held in Northern Kentucky Area Development District v. Snyder that where employment is conditioned on the employee agreeing to arbitrate claims – that is, agreeing to arbitrate is a requirement to getting (or keeping) a job – that requirement violates Kentucky state law.  This ruling makes Kentucky the first state in the country to prohibit mandatory employee arbitration agreements, and will have, at least for now, a direct and immediate impact on employers throughout the state. 

Northern Kentucky Area Development District (“NKADD”) is a government entity funded by taxpayers to administer social programs throughout Northern Kentucky.  Danielle Snyder worked for NKADD and signed an arbitration agreement as a condition of her employment.  After being terminated, Snyder sued NKADD under the Kentucky Whistleblower Act and the Kentucky Wages and Hours Act.  NKADD immediately moved to stay the proceedings and to compel arbitration based on the parties’ arbitration agreement.  Both the trial court and the state appellate court denied NKADD’s motion.  The case went up to the Kentucky Supreme Court.

The case hinged on the court’s interpretation of Kentucky Revised Statute (“KRS”) 336.700(2), and its determination as to whether that statute is preempted by the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1, et seq.  Under the Kentucky statute, employers are prohibited from conditioning current or prospective employees’ employment on their agreement to arbitrate or waive claims they may have against their employer. The FAA, however, broadly protects arbitration agreements and, through the Constitution’s Supremacy Clause, preempts statutes that attack or discriminate against the use of such agreements.  According to the court, the FAA preempts any state statute that directly discriminates against or prohibits arbitration agreements entirely.

Nonetheless, the court held that KRS 336.700(2) is not preempted by the FAA because it does not actually single out or discriminate against all arbitration agreements.  Rather, the court explained the statute simply prevents an employer from conditioning employment on the employee’s agreement to arbitrate.  Further, the court reasoned that the statute is not an anti-arbitration provision, but instead is an anti-employment discrimination provision that “uniformly voids any agreement diminishing an employee’s rights against an employer when that agreement had to be signed by the employee on penalty of termination or as a predicate to working for that employer.”  Therefore, the court held that the FAA does not preempt KRS 336.700(2), and NKADD’s agreement violates the state statute.

How long this case will remain binding precedent in Kentucky is unclear.  It likely will be challenged and could be overridden by changes made to the statute by the Republican-controlled Kentucky General Assembly, or possibly appealed to the United States Supreme Court. (Interestingly, the Kentucky Supreme Court did not cite to or reference Epic Systems Corp. in its decision.)  Until this ruling is challenged, Kentucky employers (and multi-state employers with employees in Kentucky) who currently require arbitration agreements as a condition of hire or continued employment will need to think about how they want to proceed to avoid having those agreements invalidated by Kentucky state courts.  Although there are a number of potential ways to proceed, some options include allowing employees to “opt out” of the mandatory arbitration provision or removing entirely the conditional language from agreements to avoid the application of KRS 336.700(2).  Further, although not necessarily desirable, employers could chose to forego any form of arbitration until the issue is resolved fully and finally in Kentucky.  Employers are encouraged to consult with counsel regarding any changes to their arbitration agreements in light of this new ruling.

Melissa Legault contributed to this post.