Enforceability of Employment Arbitration Agreements

If you are hiring new employees or developing a new employment contract, you may be wondering if you put an arbitration agreement in the contract. For many employers, arbitration agreements are preferable for resolving employment disputes that may arise at a later date. However, it is extremely important for employers to ensure that arbitration agreements are enforceable. Generally speaking, an arbitration agreement must be in place before a dispute arises for which the employer wants to compel arbitration.  

What is an Arbitration Agreement? 

Arbitration is a form of alternative dispute resolution (ADR) in which an issue is presented by two parties before an arbitrator in a confidential setting, and the arbitrator rules on the case.

An employment arbitration agreement in an agreement between an employer and an employee to resolve disputes that may arise through a confidential and binding process known as arbitration instead of through the courts. When an employee agrees to an enforceable arbitration agreement, any disputes that arise will need to be heard and decided by an arbitrator as opposed to by a judge or jury.  While arbitration has the potential to keep costs down for businesses through the aspect of discouraging litigation, employers should also be aware that arbitrations themselves can actually be more costly than litigation in the courts. Because of that, employers should carefully weigh the pros and cons of arbitration before instituting an employment arbitration agreement.

Federal and Texas Law on Arbitration 

Both the Federal Arbitration Act and the Texas Arbitration Act allow employers and employees to enter into arbitration agreements. According to the Texas statute, an employment arbitration agreement is enforceable for a dispute that exists at the time of the agreement or arises after the agreement is executed.  

In other words, in most situations, an employer cannot attempt to compel an employee to arbitrate a dispute once the dispute arises if there is no arbitration agreement that is already in place. There also are some issues that are not arbitrable, such as a claim for personal injury.

In some cases, businesses can use arbitration clauses to limit class action claims. The U.S. Supreme Court has largely supported the use of arbitration clauses, and has allowed businesses to include clauses that result in the waiver of class action claims. For example, in 2011, the U.S. Supreme Court ruled that the Federal Arbitration Act (FAA) preempts certain state laws that have the capacity to invalidate an arbitration clause on the grounds that the arbitration clause is unconscionable because it contains a class action waiver.

In that case, AT&T Mobility LLC v. Concepcion (2011), a group of consumers brought a class action claim against AT&T Mobility LLC, alleging that the businesses had engaged in fraud by promising a free phone to new subscribers but then charging tax on the retail value of the phone. AT&T Mobility LLC had an arbitration clause in its contract of service which compelled arbitration. The U.S. Court of Appeals for the Ninth Circuit ruled that the arbitration clause was unconscionable, and thus unenforceable, under California law. Further, the Ninth Circuit ruled that the FAA did not preempt California state law. However, the U.S. Supreme Court disagreed. In a 5-4 decision, the U.S. Supreme Court ruled that the FAA does preempt state law, and that the arbitration act was enforceable.

The U.S. Supreme Court followed this case by ruling that arbitration clauses will typically be enforceable when they apply to federal claims, including class action lawsuits, unless there is “contrary congressional demand.” That case, American Express Co. v. Italian Colors Restaurant (2013), was again a 5-4 decision.

In further support of arbitration agreements, the U.S. Supreme Court has also ruled that the FAA allows employers to force employees to sign arbitration agreements in which employees waive their rights to file a class action claim. In Epic Systems Corp. v. Lewis (2018), in another 5-4 decision, the Court ruled that the FAA takes precedence over the National Labor Relations Act. Although the U.S. Court of Appeals for the Seventh Circuit ruled that an employer requiring an employee to sign an arbitration agreement was unenforceable, the U.S. Supreme Court overruled this decision. In doing so, the Court made it more likely that more employers will require employees to waive their rights to filing class action claims and to compel arbitration.

Sexual Harassment and Arbitration Clauses in Texas

Several states in the U.S. have recently amended employment laws to prohibit employers from enforcing arbitration clauses in employment disputes involving allegations of sexual harassment in the workplace. These shifts in the law largely grew out of the #MeToo movement, and other states are considering such changes to the law. A recent ruling out of Houston gives some indication that Texas law may be shifting in this direction. In Bambace v. Berry Y&v Fabricators, LLC (2019), the plaintiff filed a claim under the Texas Labor Code for unlawful sexual harassment and retaliation. The employer tried to compel arbitration based on an arbitration agreement. However, the court held that enforcing the arbitration in a sexual harassment claim, in which the arbitration would be confidential and binding, is against public policy.

Employers in Dallas should keep this case and others like it in mind when considering whether an arbitration agreement is appropriate and whether it will be enforceable. 

Contact a Dallas Employment Lawyer

If you have questions about using arbitration agreements or enforcing an existing arbitration agreement in an employment contract, it is important to speak with an experienced Dallas employment lawyer. Do not hesitate to get in touch with our firm to learn more about how we can assist you. Contact Simon Paschal PLLC for more information.

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