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Mandatory Arbitration of Employment Discrimination Disputes Gaining Approval

April 1, 1994

Employment discrimination claims have long been thought to be outside the scope of the arbitration provisions of collective bargaining agreements and employment contracts. In Alexander v. Gardner-Denver Co., 415 U.S. 36 (1974), the U.S. Supreme Court ruled that an employee whose union unsuccessfully arbitrated a grievance relating to his discharge nevertheless remained free to institute suit against the employer under Title VII of the Civil Rights Act of 1964. Even though the employee's claims of discrimination had been raised and rejected in the arbitration, the Court concluded that there was "no suggestion in the statutory scheme [of Title VII] that a prior arbitral decision either forecloses an individual's right to sue or divests federal courts of jurisdiction." After Gardner-Denver, the conventional wisdom was that an agreement to arbitrate disputes arising under an employment contract would not insulate an employer from statutory claims of employment discrimination.

In 1991, however, the Supreme Court revisited the topic in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991). Unlike Gardner-Denver, which involved arbitration under a collective bargaining agreement, Gilmer concerned a securities industry registration agreement, entered into by a securities representative as a condition of his employment with a brokerage firm, which provided for mandatory arbitration of all disputes. The Court held that such an agreement was fully enforceable and that the plaintiff's employer could compel arbitration of an age discrimination claim. The Gilmer decision rejected the argument that Gardner-Denver made arbitration agreements invalid as to statutory discrimination claims. Rather, only statutory claims that are beyond the scope of an arbitration agreement (as was the case in Gardner-Denver) are exempt from binding arbitration.

Arbitration of employment discrimination claims carries several distinct advantages for employers - most notably, the opportunity to avoid the risks of a jury trial. As a result, since the Gilmer decision, many employers have made it a practice to write mandatory arbitration provisions into employment contracts. While the enforceability of such provisions with respect to employment discrimination claims continues to come under challenge, a number of federal district courts have enforced such agreements and have required plaintiffs to arbitrate discrimination claims rather than litigate in court. For example, in DiCrisci v. Lyndon Guaranty Bank of New York, 807 F. Supp. 947 (W.D.N.Y. 1992), the court granted enforcement to an arbitration clause contained in an employment agreement and directed the parties to arbitrate the plaintiff's sex discrimination claim. The court took note of the strong federal policy favoring arbitration of disputes and supporting the enforceability of arbitration agreements. All doubts, the court observed, should be resolved in favor of arbitration.

In addition to arguments that statutory discrimination claims should not be subject to mandatory arbitration, some employees have challenged the enforceability of arbitration agreements based on the Federal Arbitration Act ("FAA"). The FAA provides the authority for the federal courts to stay court actions where the dispute is subject to arbitration. However, section 1 of the FAA states that "nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." Thus, employees have argued that employment contracts fall outside of the scope of the FAA. The Supreme Court did not address this issue in Gilmer, but every federal court that has faced this argument since Gilmer has rejected it, finding instead that the FAA section 1 exemption is limited to employment contracts for employees in the transportation industries, such as railroad workers and seamen. Other contracts of employment are not exempt from the FAA, and arbitration agreements arising from such contracts are therefore enforceable.

State courts in New York and California appear to be following the same trend in favor of arbitration. In Fletcher v. Kidder, Peabody, 81 N.Y.2d 623, 601 N.Y.S.2d 686, 619 N.E.2d 998 (1993), the Court of Appeals of New York reversed a long line of case law in the wake of Gilmer and ruled that enforcement of an agreement to arbitrate employment discrimination claims is appropriate under state law. Similarly, in Spellman v. Securities, Annuities and Insurance Services, Inc., 8 Cal. App. 4th 452, 10 Cal. Rptr. 2d 427 (Second Dist. 1992), the California Court of Appeal applied an agreement to arbitrate to preclude court litigation of claims of racial discrimination.

Outside the employment contract setting, some employers have promulgated company policies requiring arbitration of employment discrimination claims even where the employees do not have employment contracts and are employed "at-will." For example, in an employment application form or employee handbook, the employer might include a statement that discrimination and other claims arising out of the employment relationship that otherwise could be litigated in court are subject to mandatory arbitration.

Although it does not appear that any court has yet considered the enforceability of an arbitration requirement promulgated unilaterally by an employer, the fact that the employee accepts employment and/or continues employment after being advised of the requirement suggests that such a requirement should be enforceable. Certainly the fact that an employment relationship is at-will is no barrier to the enforceability of such a requirement. In Hull v. NCRI Corporation, 826 F. Supp. 303 (E.D. Mo. 1993), the court upheld a broad arbitration clause against an employee who filed suit under Title VII, the Age Discrimination in Employment Act, and the Missouri Human Rights Act. The court noted the strong federal policy favoring arbitration and rejected plaintiff's argument that the agreement to arbitrate was not enforceable because the employment contract was terminable "at will." The employee argued that, since the employer could terminate the employment at will, the agreement to arbitrate lacked mutuality. The court found otherwise, holding that an arbitration agreement is akin to a covenant not to compete, which survives the termination of the contract, and which is not devoid of mutuality merely because the underlying employment contract was terminable at any time by either party. Thus, despite the plaintiff's at-will status, the arbitration agreement contained in her employment contract was enforced and precluded court litigation of her discrimination claims.

Thus, the developing law appears to favor the enforcement of mandatory pre-dispute agreements to arbitrate employment discrimination claims. However, this trend has prompted the introduction of a bill in Congress that would prohibit employers from requiring employees to waive statutory rights and agree to arbitration of discrimination claims (S. 2012). The bill was referred to committee and its prospects for passage are unclear. In the meantime, employers may wish to consider re-quiring arbitration of discrimination claims as a condition of initial or continued employment. By requiring arbitration of such disputes, employers may substantially reduce litigation costs and avoid the delay and aggravation of both administrative proceedings and federal court litigation. Although the ultimate enforceability of pre-dispute arbitration agreements in employment contracts and employer policies is not yet finally settled, the initial success of the employers in the cases arising to date is encouraging.