Jurisprudence

The Arbitration Fight Isn’t Over

How states can counteract the Supreme Court’s awful ruling in Epic Systems v. Lewis.

 Justice Ruth Bader Ginsburg poses for a photo of the Supreme Court justices.
Justice Ruth Bader Ginsburg wrote in dissent that “[c]ongressional correction” of the court’s “egregiously wrong” decision is “urgently in order.”
Jonathan Ernst/Reuters

The Supreme Court held on Monday that lower courts must enforce individual arbitration clauses in employment contracts—a ruling that effectively allows companies to compel workers to pursue employment-related claims in one-on-one closed-door proceedings that are not subject to substantive judicial review. Union leaders and other workers’ rights activists are understandably dismayed by the 5–4 result in Epic Systems v. Lewis, which is the latest in a line of Supreme Court decisions extending the 1925 Federal Arbitration Act far beyond its original scope. But this week’s loss need not spell the end of the effort to protect workers from the effects of the most onerous arbitration clauses. Instead, it shifts the focus from the national level to the states.

Under other circumstances, the logical response to a decision like this one would be to lobby Congress to change the law. To that end, Justice Ruth Bader Ginsburg—joined in dissent by three of her colleagues—wrote that “[c]ongressional correction” of the court’s “egregiously wrong” decision is “urgently in order.” Richard Trumka, president of the AFL-CIO, likewise said that Congress should “immediately enact” legislation that overrides the Epic Systems ruling. But that sense of immediacy is likely to be lost on a Congress that so far has been more interested in rolling back workplace protections and clearing the way for greater use of arbitration provisions than in standing up for workers’ interests. And in the unlikely event that Congress does pass legislation to undo Monday’s decision, the bill will likely die on the desk of President Donald Trump, whose administration has gone out of its way to support employers seeking to enforce individual arbitration clauses.

If Congress won’t act, states and localities can and should. Subnational governments have several policy tools they can use to counteract some of the most pernicious consequences of individual arbitration mandates. Governors, state lawmakers, mayors, and city council members can take concrete steps in the coming months to protect their constituents from the fallout of Monday’s decision. And workers’ rights advocates ought to demand action from their state and local leaders.

In a world in which labor markets were perfectly competitive and workers had full information about arbitration provisions, the decision in Epic Systems would not be a cause for much concern. Some employees might choose to give up their rights to bring workplace-related claims collectively in exchange for higher wages or other benefits. If that were the case, then courts would and should respect these consensual and mutually beneficial bargains. But alas, that is not our world. Mounting evidence indicates that many employers enjoy “monopsony” power in the labor market—that is, they have the power to dictate wages and working conditions. Under those circumstances, the protections afforded by labor law become even more important. Individual arbitration clauses undermine those protections.

The Epic Systems case involved claims under the Fair Labor Standards Act, which establishes the federal minimum wage and overtime rules. FLSA provides an excellent illustration of individual arbitration’s worrying consequences. Under the lower court’s decision in Epic Systems, low-wage workers who had been paid less than the federal minimum or who hadn’t been adequately compensated for overtime could band together to bring their claims collectively. Now, whenever an employer inserts an arbitration clause into an employment agreement, each employee will have to proceed pro se or find her own lawyer to pursue a claim that, on its own, might amount to only a few hundred dollars. A prevailing plaintiff may be able to recover attorneys’ fees but could still be on the hook for expert witness expenses. And an unsuccessful plaintiff—and/or her attorney—will have to bear litigation expenses herself.

The likely result will be weaker enforcement of wage and hour laws. But the implications of Epic Systems extend to other areas of employment law as well. Individual arbitration clauses prevent workers from joining together to bring sexual harassment claims. They also stop employees from asserting other sex and race discrimination claims in court or in classwide arbitration proceedings.

What can states and localities do to change this? One thing they clearly cannot do under existing Supreme Court doctrine is impose a flat-out ban on individual arbitration clauses in employment contracts. The court has said that “[w]hen state law prohibits outright the arbitration of a particular type of claim,” the state law is “preempted” (i.e., overridden) by the Federal Arbitration Act. To be sure, the FAA by its own terms does not apply to employment contracts, but that ship has sailed, and all members of the court now accept as a matter of precedent that the law applies to employment contracts outside the transportation industry. (Sailors, railroad employees, and other transportation workers are still exempt from the FAA’s reach.)

The FAA does not, however, prevent state and local governments from using their own market power to protect workers from individual arbitration clauses. Just as several states and municipalities mandate that government contractors agree not to discriminate against employees on the basis of gender identity, they also could require contractors to agree not to impose individual arbitration clauses on workers. State and local governments have the right to demand that firms receiving taxpayer money treat their workers fairly and accept the legal consequences that follow from violations of labor law. Given that state and local governments purchase somewhere around $1.5 trillion worth of goods and services from vendors each year, a ban on individual arbitration provisions that applies to firms doing business with state and local governments would likely lead many employers to drop those clauses from their contracts.

A second strategy that state and local governments can utilize is one California has pioneered already. California’s Private Attorney General Act of 2004, known as PAGA, imposes monetary penalties for violations of the state’s labor code. It also authorizes aggrieved employees to bring civil actions on the state’s behalf against employers who violate state labor law. These employees—as the statute’s name implies—act as “private attorneys general,” litigating claims for the state. If they successfully recover penalties from their employer, then 75 percent of the recovery goes to the state Labor and Workforce Development Agency, and the remaining 25 percent goes to the aggrieved employees who were the victims of the violation.

Some employers in California have argued that the Federal Arbitration Act pre-empts PAGA claims. The California Supreme Court has rejected that argument, reasoning that a PAGA action is brought on behalf of the state—and there is no arbitration agreement between the state and a private employer. So far, the U.S. Supreme Court has declined to review challenges to PAGA.

Finally, state and local governments could require that any employer that compels its employees to give up their collective action rights must disclose that fact when it posts new job openings. The rationale would be that potential employees should know that once they get the job, they’ll be required to sign away important procedural rights. Concededly, many job seekers will not have the luxury of picking and choosing between employers that require individual arbitration and employers that let workers pursue claims collectively. Still, a disclosure requirement would allow some job seekers to make more informed choices, and it might cause some employers to reconsider their reliance on individual arbitration once they know they have to be transparent about these provisions.

Is it possible that pro-arbitration justices will reach out to knock down state and local efforts like the ones outlined above? Sure. FAA decisions over the past couple of decades have demonstrated that statutory text and Supreme Court precedent do not necessarily limit the law’s scope. That is one more reason why state and local governments should pursue a multipronged approach toward protecting workers within their borders—if any one strategy fails, the others still serve as backups. It’s a more promising approach than the alternatives, and one that—to borrow Justice Ginsburg’s words—is “urgently in order.”