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Supreme Court upholds arbitration clauses in employment contracts

In what many consider a major victory for employers, the U.S. Supreme court has upheld the use of mandatory arbitration clauses or agreements in employment contracts. These clauses typically require employees to bring legal complaints singly in arbitration as opposed to in class action lawsuits.

The left-leaning Economic Policy Institute has found that about 56 percent of American private-sector workers who aren't unionized have signed individual arbitration agreements with their employers. The Supreme Court's ruling is likely to dramatically increase the practice.

The case before the court involved three consolidated wage-and-hour disputes. In each one, employees who had signed individual arbitration agreements nevertheless sued their employers. They argued that the agreements violate the 1935 National Labor Relations Act, which guarantees workers the right to collective action. The employers countered that the 1925 Federal Arbitration Act entitles them to ban collective action by contract.

If the court had found the NLRA and the Federal Arbitration Act to be in conflict, it would likely have ruled that the newer law -- the NLRA -- displaced the older one. The court did not find the laws to be in conflict.

Writing for a 5-4 majority, Justice Neil Gorsuch said that individual arbitration agreements are to be enforced as written. "The policy may be debatable but the law is clear," he wrote. Since the two laws can be read as harmonizing, the majority felt its duty lay in reading them that way.

The dissenters were led by Justice Ruth Bader Ginsburg. They considered the ruling "egregiously wrong" and noted that the costs of arbitration may, in some cases, outweigh any potential award. In one of the cases before the court, for example, a plaintiff was quoted a legal fee of $200,000 for an arbitration meant to recover $1,800 in overtime pay.

Ginsburg also argued that the NLRA was intended, in part, to level the playing field between employers and employees, who generally lack the bargaining power to resist individual arbitration clauses even if they don't wish to sign them.

Finally, Ginsburg predicted that uniform use of individual arbitration agreements could essentially privatize the enforcement of many employment laws. This could, in theory, mean that employers lose much of their incentive to obey employment laws.

What many employers see in the decision is a way to reduce their fear of an extravagant class-action verdict from an activist jury.

If your organization is considering including an individual arbitration clause in your employment contracts, you should discuss your intentions with your corporate or employment counsel. This ruling provides an opportunity to substantially reduce your litigation risk, but you should take care to ensure that your contracts remain legal and enforceable.

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