Employer-Mandated Arbitration v. The Working Poor

March 23, 2020 by Benjamin Kamelhar

by Daniel Baird Wesson

“[V]irtually unnoticed,” tens of millions of Americans have lost their right to a day in court.[1] Private employers now commonly insert pre-dispute arbitration clauses into their employment contracts.[2] That is, the employer and new employee agree that they are not allowed to sue each other in court—complaints must be taken to a specified arbitration forum.[3] If either party complains in court, the opposing party can file a motion to compel arbitration.[4]

This nationwide development is especially harmful to low-wage workers, who lose an estimated fifteen billion dollars every year through wage theft.[5] Workers who have valid claims under the Fair Labor Standards Act—such as not being paid overtime, not being paid minimum wage, or simply not being paid at all—are forced into arbitration.[6]

The emerging literature on arbitration is clear; empirical studies show that arbitration favors employers.[7] That is, compared to litigation, employees in arbitration win less often and when they do win, they win smaller awards.[8] The largest impact of mandatory arbitration may be that claims are never pursued.[9] One study runs against this consensus; it finds that employees in arbitration actually win more often and with higher awards than employees in litigation.[10] Tellingly, this study is funded by the Institute for Legal Reform, an affiliate of the Chamber of Commerce.[11] However, both the Chamber of Commerce and academic studies agree that arbitration is generally faster and cheaper than litigation.[12] In any case, because many arbitration proceedings are secret and never publicly disclosed, they are difficult to study.[13]

Pre-dispute arbitration clauses in employment contracts are not inherently damaging to employee interests; the clauses are harmful to employees because employees lack bargaining power relative to employers. In 2002, “the balance of power between employers and workers was ‘badly skewed’ in favor of employers,” and in 2018, the disequilibrium was worse.[14] There is “wide agreement” about growing economic inequality and an erosion of labor standards at the bottom of the market.[15] Further, in the past few decades, relative to capital, labor’s share of national income has decreased,[16] reducing labor’s bargaining power. With seventy-eight percent of workers living paycheck to paycheck,[17] most workers cannot afford to forgo employment opportunities. The working poor, many of whom are unwillingly stuck with part-time work because they cannot find full-time work,[18] are forced to accept whatever work is available.

The working poor are not in a position to turn down employment because of a pre-dispute arbitration clause. The vast majority of workers do not sue their employer,[19] so employees signing contracts rationally predict that the clause probably will not impact them individually. Further, employees may not read their employment contracts,[20] and if they do, they may not know that arbitration probably favors their employer.

Losing access to courts is especially pernicious to vulnerable workers because courts are a means through which labor rights are enforced. Current and future laws intended to protect employees through a private right of action are useless if employees are shuffled into a forum that is rigged against them. The “obvious reason why” employers insert pre-dispute arbitration clauses into their employee contracts is to strip workers of their rights.[21] Corporations secure higher profits by paying workers below-living wages[22] and preventing them from pursuing effective legal recourse.

Most devastatingly for workers, arbitration agreements can prevent them from banding together to form a plaintiff class in any forum; what would have been a class action lawsuit against an employer is instead individualized arbitration.[23] The class action procedure facilitates claims not worth pursuing individually but are meritorious and worth pursuing collectively. Class actions are especially important to low-paid employees, who may have claims too low in value individually to attract attorney representation. Therefore, forced arbitration is a powerful tool for employers seeking to prevent their employees from vindicating their legal rights.



[1] Jessica Silver-Greenberg & Michael Corkery, In Arbitration, a ʻPrivatization of the Justice Systemʼ, NYTimes (Nov. 1, 2015), https://www.nytimes.com/2015/11/02/business/dealbook/in-arbitration-a-privatization-of-the-justice-system.html; alexander j.s. colvin, Economic Policy Institute, The Growing Use of Mandatory Arbitration (2018) (“Among private-sector nonunion employees, 56.2 percent are subject to mandatory employment arbitration procedures.”).

[2] Colvin 2018.

[3] 9 U.S.C. § 2.

[4] 9 U.S.C. § 3.

[5] David Cooper & Teresa Kroeger, Employers Steal Billions from Workers’ Paychecks Every Year, Econ. Pol. Inst. (May 10, 2017), https://www.epi.org/publication/employers-steal-billions-from-workers-paychecks-each-year/.

[6] Alexander J.S. Colvin, The Growing Use of Mandatory Arbitration, Econ. Pol. Inst.  (Apr. 6, 2018), https://www.epi.org/publication/the-growing-use-of-mandatory-arbitration-access-to-the-courts-is-now-barred-for-more-than-60-million-american-workers/.

[7] See generally Alexander J.S. Colvin, An Empirical Study of Employment Arbitration: Case Outcomes and Processes (2011), http://digitalcommons.ilr.cornell.edu/articles/577 (last visited Dec. 20, 2019); Jean R. Sternlight, Disarming Employees: How American Employers Are Using Mandatory Arbitration to Deprive Workers of Legal Protection (2015), http://scholars.law.unlv.edu/facpub/935 (last visited Dec. 20, 2019); Estreicher et. al., Evaluating Employment Arbitration: A Call for Better Empirical Research, 70 Rutgers U. L. Rev. 375 (2018).

[8] Colvin (2011) at 6-11.

[9] Cynthia L. Estlund, The Black Hole of Mandatory Arbitration, 96 N.C. L. Rev. 679, 682 (2018).

[10] Mary Donovan & Nam D. Pham, Fairer, Faster, Better: An Empirical Assessment of Employment Arbitration (2019), https://www.instituteforlegalreform.com/uploads/sites/1/Empirical-Assessment-Employment-Arbitration.pdf (last visited Dec. 20, 2019) (The study’s methodology section lacks detail to the extent that it is impossible to replicate its findings using its publicly available dataset).

[11] Id.; The Chamber of Commerce represents the interests of businesses. U.S. Chamber of Commerce, https://www.uschamber.com/about/about-the-us-chamber-of-commerce (last visited Dec. 20, 2019).

[12] Estreicher at 382; Pham & Donovan at 5.

[13] Estlund, The Black Hole of Mandatory Arbitration at 682.

[14] Stephen F. Befort, The Declining Fortunes of American Workers: Six Dimensions and an Agenda for Reform, 70 Fla. L. Rev 189, 190 (2018).

[15] Cynthia Estlund, What Should We Do After Work? Automation and Employment Law, 128 Yale L. J. 254, 302 (2018).

[16] See generally Thomas Piketty, Capital in the Twenty-First Century (Harvard University Press 2014).

[17] CareerBuilder, http://press.careerbuilder.com/2017-08-24-Living-Paycheck-to-Paycheck-is-a-Way-of-Life-for-Majority-of-U-S-Workers-According-to-New-CareerBuilder-Survey (last visited Dec. 20, 2019).

[18] Nantiya Ruan, Corporate Masters & Low-Wage Servants: The Social Control of Workers in Poverty, 24 Wash. & Lee J. Civil Rts. & Soc. Just. 103, 135 (2017) (citing Vincent Fusaro & H. Shaefer, How Should We Define “Low-Wage” Work? An Analysis Using the Current Population Survey, Monthly Lab. Rev. 2 (U.S. Bureau of Lab. Stat., Oct. 2016), https://www.bls.gov/opub/mlr/2016/article/pdf/how-should-we-define-low-wage-work.pdf).

[19] See Hiscox, Employee Charge Trends Across the United States 4 (2015) (11.7 percent of employers sampled were sued in 2014, suggesting that most employees do not sue their employer.).

[20] Alexia Fernandez Campbell, The House Just Passed a Bill that Would Give Millions of Workers the Right to Sue their Boss, Vox, (Sep. 20, 2019, 11:30AM), https://www.vox.com/identities/2019/9/20/20872195/forced-mandatory-arbitration-bill-fair-act.

[21] Brief for Ten International Labor Unions et al. as Amici Curiae Supporting Respondents, Epic Systems Corporation v. Lewis, 138 S.Ct. 1612 (2018) (No. 16-285).

[22] See Ruan, supra note 18, at 166.

[23] See Epic Systems Corp. v. Lewis, 138 S.Ct. 1612, 1623 (2018).