Federal Arbitration Act: Pros and cons of Supreme Court decision

In a polarizing recent decision, on May 21, 2018, the United States Supreme court upheld the Federal Arbitration Act (FAA), and denied employees the right to organize and collectively dispute labor law violations.  The decision, which was reached by a narrow one-vote margin, ostensibly insulating employers from their single largest employment risk — class-action lawsuits.

While supporters of the decision rejoiced, dissenters echoed the reaction of Justice Ruth Bader Ginsburg who called the ruling “egregiously wrong.” The court’s decision will change the employment landscape for employers as well as for millions of nonunion private sector employees nationwide. Because of its widespread impact, the pros and cons of this landmark ruling are worth examining. 

Background 

Arbitration agreements barring employees from banning together to settle labor disputes has long been a topic of debate. The court’s May 21 decision came in three notable cases: Epic Systems Corp. v. Lewis, Ernst & Young LLP v. Morris, and National Labor Relations Board v. Murphy Oil USA Inc.  The Obama administration issued support for the challengers in said cases, but the Trump administration adopted an opposing stance and encouraged the court to uphold the arbitration agreements. 

Arguing that the 1925 FAA supersedes the 1935 National Labor Relations Act (NLRA), vocal majority opinion supporter Justice Neil Gorsuch claimed, “The policy may be debatable but the law is clear: Congress has instructed that arbitration agreements like those before us must be enforced as written.”  Disputing the authority of the NLRA, Gorsuch maintained that Congress enacted the FAA to “overcome judicial resistance to arbitration.”   

Staunch opponents of the ruling, including Ginsberg, the National Employment Law Project (NELP), and the National Labor Relations Board (NLRB), denounced the court’s decision. They argued that stringent arbitration agreements forcing employees to settle labor and wage disputes individually will only serve to hurt workers — especially the low-wage population — and lead to underenforcement of federal and state laws designed to safeguard and promote employees’ rights. 

Although divisive, the Court’s position is aligned with a string of other high-court decisions dating back to the ‘90s that have greatly extended the reach of the Federal Arbitration Act of 1925 — a statute originally implemented to uphold commercial contracts between companies.  How the decision will impact litigation, however, may vary depending on the state.  In Arizona, for instance, the NLRB is a very active agency and its mission and spirit seem to conflict with the new ruling.

Outcome Benefits 

For employers and their labor attorneys, the court’s decision on arbitration agreements provides immeasurable relief. With the new ruling in place, employers are no longer threatened by the staggering cost and organizational crush of class-action lawsuits. Data collected over the past ten years shows that not only are employee lawsuits increasing exponentially, but they are typically fraught with unpredictable juries and unlimited payouts to plaintiffs.  

Employers aren’t the only ones who stand to benefit from the ruling.  Supporters of the decision argue that arbitration preserves judicial economy and is a fair, private, and cost-effective approach to settling labor disputes for all parties involved.  Additionally, proponents point out that class-action lawsuits take a long time to resolve and rarely result in substantial payouts for the affected workers involved, whereas arbitration provides an efficient, streamlined process, alleviating much of the stress and emotional drain caused by lengthy litigation. A final pair of shared benefits of arbitration is flexibility and comfort. Arbitration takes place in a setting that is less stressful and formal than a courtroom, and there are no binding trial periods or scheduling constraints imposed by a court.  

For consumers, enforceable arbitration agreements help protect their wallets. When an employer is forced to account for a reserve to cover changes in their employment rules and infrastructure, they in turn raise prices on consumer to make up for it. 

Outcome Disadvantages

Dissenters of the court’s decision to uphold the FAA point out the inevitable drawbacks that nonunion employees now face. Among the top disadvantages, they cite the fear of retaliation and the absence of “safety in numbers” provided by collective action, especially in sensitive matters like discrimination and sexual harassment, as recently highlighted by the #MeToo movement. Another key detriment for workers is the likelihood that individual employees will not recover enough money in their settlement to offset the exorbitant attorney and court costs.

Additionally, without much recourse, employees are at the mercy of employers holding the power who can present “take it or leave it” terms and conditions that often may not allow for transparency. Opponents of the decision also highlight the inequities between employer and employee when it comes to settling labor disputes through arbitration. Unlike big companies who have longstanding relationships and contracts in place with arbitrators and arbitration firms, individuals carry no influence or ties to those involved in the decision-making process. 

Shared Accountability

While a favorable and flourishing economy affords more employment options, it is prudent for workforce members and job seekers to carefully vet potential employers.  It is equally advisable for employers to review their arbitration agreements to ensure they are clear, well-written, and sound. Seeking legal counsel is always encouraged when questions or concerns arise. 

As with any law or policy, the Supreme Court’s decision to uphold the Federal Arbitration Act was met with both strong support and strong opposition. While experts believe that the ruling will remain firmly in place for the foreseeable future, Congress can act to amend it.