Do Mandatory Employment Arbitration Agreements Still Have Utility in the Workplace?

    By Keith Grossman, Glen Kraemer, and Anna Pham

    Hotels typically require employees to agree to mandatory arbitration of many potential employment claims. But, a federal law signed by President Biden on March 3 has placed limits on mandatory arbitration in cases involving claims of sexual assault and harassment.

    The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 is intended to facilitate access to the court system for such disputes by limiting arbitration to situations where employees and employers mutually elect arbitration after a dispute has arisen, rather than being forced into arbitration through a pre-dispute agreement. The Act applies to all disputes arising, or currently pending, on or after March 3, 2022, and includes alleged sexual harassment and sexual assault claims based on the conduct of guests or customers toward employees, as well as conduct by employees toward other employees.

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    The new law amends the Federal Arbitration Act (FAA) in three meaningful ways. It:

    • Invalidates employment pre-dispute agreements and class action waivers that require claims related to sexual assault or sexual harassment to be arbitrated on an individual basis;
    • Ensures that the employee who signs an arbitration agreement has complete autonomy in deciding whether to arbitrate sexual harassment or sexual assault claims or to pursue such claims in court, either individually or on a collective basis; and
    • Provides that regardless of the contractual terms of the arbitration agreement, the enforceability of the agreement as to covered claims must be decided by a court, not an arbitrator.

    While the changes are meant to create more transparency concerning remedies for workplace sexual misconduct, there are a number of issues that remain unresolved. For example, it’s not clear if the law allows an employee alleging a sexual harassment claim along with another related employment claim to litigate the entire dispute in court, despite a signed mandatory arbitration agreement. Another open question is whether certain retaliation claims are covered, such as a claim of retaliation for reporting an internal complaint of sexual harassment without a stand-alone claim of sexual harassment or assault. Finally, the law is silent on the enforceability of jury waivers, so in California whether such waivers are enforceable or even permissible likely is an issue of state law.

    Pragmatic Considerations for Excluding Other Claims from Mandatory Arbitration Agreements
    In addition to legal considerations around arbitration agreements, hotels should consider other factors like employee relations, company culture, and public/customer relations issues. The new law doesn’t prohibit employers from compelling arbitration for claims involving race, disability, age discrimination, or other civil rights claims, but it’s worth asking what message is conveyed if you force some types of cases to arbitration and bar class actions, yet litigate sexual harassment matters in court and on a class basis? We recommend employers carefully assess their workforce and company culture and determine how such differentiated treatment of civil rights claims will impact employee relations and engagement. In addition, the message communicated by treating protected categories differently and compelling arbitration of non-sexual harassment and assault claims won’t be lost on a hotel’s customers (and, for public companies, on potentially activist shareholders). It’s also worth noting that there is the potential that the FAA could be further amended to exclude all discrimination claims (as well as other employment claims) from mandatory arbitration agreements. Accordingly, for legal, practical, and brand identity reasons, we believe there is merit to hotel employers pausing to consider making the arbitration of all statutory discrimination claims voluntary. In a similar vein, consideration also should be given to potentially excluding from mandatory arbitration agreements claims of retaliation based on alleged assertion of rights protected by discrimination laws.

    Mandatory Arbitration of Wage & Hour and PAGA Claims
    Notwithstanding our recommendation for discrimination and related retaliation claims, we recommend that employers maintain mandatory arbitration agreements that would cover wage and hour, PAGA, and other non-statutory employment claims, as well as include class/representative action waivers. Mandatory arbitration agreements with class and representative action waivers covering these types of claims are still permissible under the FAA, and are an important tool requiring employees to arbitrate their claims on an individual basis, thereby avoiding potential class/representative action costs and exposure.

    However, a number of states have enacted legislation that seeks to prohibit pre-dispute mandatory arbitration agreements of single plaintiff, class, and representative actions in employment cases. In California, employers have faced a conundrum about their mandatory arbitration agreements since the passage of AB51, which added Labor Code section 432.6 and effectively banned all mandatory employment arbitration agreements covering all types of employment disputes as well as class action and jury waivers. We have questioned the viability of parts of AB 51 in light of the broad preemptive scope of the FAA, especially as it has been interpreted by the U.S. Supreme Court. To date, though, the Ninth Circuit has upheld key portions of the law, although the Supreme Court has agreed to review this legal issue in Viking River Cruises, Inc. v. Morian. This decision will have significant consequences either way for California hotel employers, and we expect the court’s decision this summer.

    So, What Should Hotel Employers Do?
    Minimally, employers will need to review their arbitration agreements to ensure compliance with the Act. In addition, employers will need to make a thoughtful assessment of how they will treat other discrimination, civil rights, and retaliation claims in light of employee, guest, customer, and public relations considerations. Employers should also expect to see a potential increase of sexual harassment and/or assault litigation in court, and more opportunities for companies to be scrutinized as to their cultures and work environments and how they address sexual and other misconduct in the workplace. Therefore, employers should:

    • Review and update their discrimination and harassment prevention policies;
    • Ensure their complaint and investigation processes are thorough, including, where feasible, deploying anonymous complaint mechanisms;
    • Strengthen training for human resources and other personnel responsible for conducting proper and impartial investigations; and
    • Provide robust regular harassment and discrimination prevention training to all employees that is not merely “check the box” and includes additional training for supervisors and managers and bystander engagement tools.

    It is also recommended that companies review their Diversity, Equity & Inclusion (DEI) programs and training, and if they don’t currently have a DEI program, consider investing in one. Hotel employers specifically should also review their agreements with their contractors and providers of contract labor, such as valet parking, night cleaning, and landscaping, to ensure those contractors have active, effective, state-of-the-art anti-harassment and discrimination programs, and training in place.

    As for mandatory employment arbitration agreements covering PAGA, wage and hour, and non-statutory employment claims, employers should monitor the U.S. Supreme Court’s impending decision in Viking River Cruises and check with experienced labor counsel to adjust their arbitration agreements to take advantage of a potentially favorable ruling, while still ensuring compliance with currently existing California law.

    Keith Grossman and Glen Kraemer are senior partners and Anna Pham is an associate with Hirschfeld Kraemer LLP, a full-service employment law firm with offices in Los Angeles and San Francisco.

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