Employees Can Be Forced to Arbitrate Workplace Disputes

June 6, 2001

The United States Supreme Court, in a closely divided 5-4 decision, ruled last month that the Federal Arbitration Act (“FAA”) applies to almost any arbitration agreement between employers and employees. In Circuit City Stores, Inc. v. Adams, the Court held that pre-dispute arbitration agreements between employers and employees are enforceable in all employment categories except for a narrow class of seaman and other transportation workers exempted by the law in 1925. Prior to the Court’s opinion, eleven other federal appeals courts had interpreted the exception, exempting contracts of employment for transportation workers, but not other employment contracts from the FAA’s coverage. The California federal appeals court, however, threw uncertainty into the arbitration field by construing the exemption to cover all contracts of employment, regardless of whether or not the worker was involved in transportation.

In the case before the Court, Adams signed an employment application which included a provision stating that all claims and controversies arising out of or relating to his employment with Circuit City were to be determined exclusively by final and binding arbitration before a neutral arbitrator. The arbitration clause expressly applied itself to various employment discrimination statutes, including Title VII of the Civil Rights Act, the Age Discrimination in Employment Act (“ADEA”) and the Americans with Disabilities Act (“ADA”).

Two years later, Adams resigned from his position as a sales counselor and sued Circuit City for employment discrimination. The company argued Adams’ suit was foreclosed by the arbitration agreement, but the California federal appeals court disagreed, holding the FAA does not apply to employment contracts.

The Supreme Court held that only transportation workers who actually move goods in foreign and interstate commerce are excluded under the FAA. The Court explained that the FAA served the public policy interest in favoring arbitration. Not only are there real benefits to the enforcement of arbitration provisions he explained, but “arbitration agreements allow parties to avoid the costs of litigation, a benefit that may be of particular importance in employment litigation.” To allow litigation to overcome arbitration agreements would introduce “considerable complexity and uncertainty . . . into the enforceability of arbitration agreements in employment contracts [and] would call into doubt the efficacy of alternative dispute resolution procedures adopted by many of the nation’s employers.” The Court’s majority opinion reaffirmed the holdings from earlier, pro-arbitration decisions.

Though the Supreme Court’s ruling has been viewed as an important victory for businesses who want to use arbitration agreements to resolve workplace disputes, the ruling should not be viewed as a green light for businesses to implement an arbitration program to resolve their employment disputes. Still unanswered by this decision is what limits are placed on such mandatory arbitration contracts by Title VII, the ADA and the ADEA.

On March 26, 2001, the Supreme Court agreed to hear a case where an appeals court ruled that the EEOC could seek injunctive relief to stop work actions that violated the ADA, but could not ask for back pay or reinstatement on behalf of specific individuals who signed arbitration agreements. Therefore, until the uncertainty over these details is resolved, legal counsel should be consulted before implementing any arbitration agreements involving workplace disputes.

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