The Supreme Court and lower federal courts are moving toward enforcement of employer-employee arbitration clauses, but some doubts remain
Arbitration offers employers a method of resolving disputes with employees that has a number of advantages over litigation. It is faster and less expensive than a court proceeding, it is less likely to generate negative publicity, and it eliminates the employer's exposure to a potentially hostile forum.
But employees, perceiving that arbitration may produce less favorable results than traditional litigation, frequently pursue their employment-related disputes in court despite having signed an arbitration agreement. Employers respond to this litigation by insisting that the Federal Arbitration Act requires the court to stay the proceeding and order the employee to arbitrate in accordance with the signed agreement.
The enforceability of arbitration agreements between employers and employees under the FAA, 9 U.S.C. [subsections] 1-14, is an unresolved and highly contested issue because of a provision in the act that renders at least some agreements unenforceable. Lower courts generally construe the provision broadly, making most employment-related arbitration agreements enforceable. Although the U.S. Supreme Court has not decided the issue, the Court's most recent pronouncement in Gilmer v. Interstate/Johnson Lane Corp.(1) suggests that it is inclined toward the lower court view. Gilmer also shows that the Court is no longer open to general challenges to the adequacy of arbitration as a method of resolving employment-related disputes. It therefore appears that arbitration agreements between employers and employees generally are enforceable.
Moreover, Gilmer casts serious doubt on the continuing validity of an earlier line of Supreme Court cases that effectively granted employees an absolute right to litigate against their employers, regardless of any agreement to arbitrate, if the dispute involved a federal statutory claim. The circumstances under which an employee can avoid a signed arbitration agreement thus appear to be extremely limited.
Applicability of FAA
A. The FAA and Section 1
The Federal Arbitration Act was first enacted in 1925 and then re-enacted and codified in 1947 as Title 9 of the United States Code. Prior to its enactment, courts routinely held that arbitration agreements were unenforceable, whether they were between businesses, individuals, or employers and employees. The principal reason for non-enforcement has been described as an "irrational judicial hostility to arbitration in general."(2) It is well established that the FAA's purpose was to end this judicial hostility and make arbitration agreements as enforceable as other contracts.(3)
The FAA covers all types of commercial arbitration agreements, not just those between employers and employees. It provides (9 U.S.C. [sections] 2):
A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.
The act calls for stays of proceedings in federal district courts when an issue in the proceeding is referable to arbitration, 9 U.S.C. [sections] 3, and for orders compelling arbitration when one party has failed to comply with an arbitration agreement, 9 U.S.C. [sections] 4.
The applicability of the FAA to arbitration agreements between employers and employees is unclear because of the provision in Section 1 of the act that renders it inapplicable to "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." Section 1 clearly makes arbitration agreements unenforceable if the employees are seamen or railroad employees. …