Biden Signs Law Limiting Employer Arbitration Mandates

The Federal Arbitration Act or FAA, enacted February 12, 1925, is federal law that provides for private dispute resolution through arbitration. The FAA recognizes benefits to society as a result of resolution of disputes in expeditious systems. It is most often implemented by use of an arbitration clause in the contract between the parties.  

An arbitration clause is a clause in a contract that requires the parties to resolve their disputes through an arbitration process. Mandatory arbitration clauses are widespread in the United States. For example, 15 of the largest 20 U.S. credit card issuers, and 7 of the 8 largest cell phone companies have arbitration clauses for resolution of disputes with customers.

In employment law, many employers have mandatory arbitration clauses in contracts with their employees, for the purpose of limiting the possibility of extreme jury verdicts in favor of former employees, as well as the risk of costly class action litigation.

Section 2 of the FAA declares that arbitration provisions will be subject to invalidation only for the same grounds applicable to contractual provisions generally, such as unconscionability or duress. Consequently, most state law that attempts to disfavors or limit the enforcement of mandatory arbitration agreements are preempted by the FAA.

Substantial federal and state litigation has evolved over the years on the issue of federal preemption precluding the ability of any state’s attempt to restrict an employer’s rights to force mandatory arbitration of disputes with employees. Generally speaking, individual states have not been successful in litigation efforts to limit the preemption provisions of the FAA.

However, President Biden has just signed into law the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021. This Act was introduced in 2017.

The Act amends the Federal Arbitration Act to give employees who are parties to arbitration agreements with their employers the option of bringing claims of sexual assault or sexual harassment either in arbitration or in court.

The Act amends the FAA to include a new section, which states, in part: “[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.”

Thus this new Act is an employment law game changer. It gives employees the option to circumvent arbitration agreements and class or collective action waivers with respect to sexual assault and sexual harassment claims.

The Act applies to all claims that arise or accrue after March 3, 2022, regardless of the date of the agreement at issue. The Act, however, does not affect claims that arose or accrued before March 3, 2022.

The Act does not affect otherwise valid arbitration agreements for claims that are not related sexual assault and sexual harassment. What is unanswered in the new law, is how it will apply when sexual assault and sexual harassment claims are intermixed with other employment law claims in a single litigation filing.

Biden Signs Law Limiting Employer Arbitration Mandates

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