Home | Business News | Browse by Publication | T | Trial

Preserving employment class actions.

Article Excerpt
Increasingly, corporations are embedding class action bans in their employment contracts. But there are solid legal arguments against these bans, and courts are starting to recognize them.

**********

For many workers who have been illegally denied benefits or who have suffered discrimination on the job, a class action is the best--and sometimes the only--means of remedying the wrong. Some workers can vindicate their rights individually, in particular those who understand their legal rights and have the means to find competent lawyers willing to handle their cases. But even in cases where these crucial requisites are present, only a class action can accomplish systemic change that benefits all employees.

Large employers increasingly seek to insulate themselves from class liability by adding terms to their employment contracts that prohibit employees from bringing or participating in class actions against the company. (1) They typically embed these bans in clauses that require binding mandatory arbitration for all employment-related disputes. Thus, an individual worker suing her employer on her own behalf and on behalf of her fellow employees is likely to face a motion to compel arbitration of her claims on an individual basis.

But there are strong legal arguments for challenging these contract terms. Many corporations argue that the Federal Arbitration Act (FAA) protects the clauses from challenges brought under state law, but a better argument is that the FAA provides that courts should enforce arbitration agreements only when they do not run afoul of state contract law principles. One of those principles is that unconscionable contracts--for example, those that would exculpate the corporation from liability for wrongdoing--will not be enforced.

Some courts have applied this and other state contract law principles to invalidate class action bans in consumer cases. These principles should apply with equal force to employment cases, particularly where the plaintiffs build a strong factual record.

The FAA permits employees to challenge provisions in arbitration clauses that act as exculpatory clauses. Since 2001, it has been clear that employers have the legal right to require prospective or current employees to submit all disputes to binding arbitration as a condition of obtaining or keeping their jobs. (2)

Not all terms in all employment arbitration clauses are enforceable, though. Nearly every arbitration clause is governed by the FAA, which applies to contracts "involving commerce"--a category so broad that the U.S. Supreme Court has held that it incorporates virtually every contract? (3)

The FAA's primary provision of substantive law states that contractual agreements for arbitration are enforceable "save upon such grounds as exist at law or in equity for the revocation of any contract." (4) This means that under the FAA, courts will not enforce a particular arbitration clause if it is invalid under principles of state law that apply to all contracts--for example, if the clause is unconscionable.

A state law (or rule of law) that applies only to arbitration clauses or that applies to all arbitration clauses of a certain type--such as a categorical rule that class action bans in consumer contracts (or employment contracts) are always unconscionable--would likely be preempted by the FAA. (5) But, by the same token, a rule invalidating exculpatory contract terms that is rooted in basic principles of law applying to all contracts would not be preempted by the FAA merely because the class action ban is embedded in an arbitration clause. (6)

The widespread practice of embedding the class...

View this article FREE - Now for a Limited Time, try Goliath Business News
Free for 3 Days!