President Signs Bill Banning Mandatory Arbitration for Certain Claims

Employers may want to review their arbitration agreements now that President Joe Biden has signed a bill into law banning enforcement of pre-dispute arbitration pacts for sexual-harassment and sexual-assault claims.

"There will be cases where victims want their claims resolved in private, but some survivors will want their day in court, and that should be their choice and nobody else's choice," Biden said at the signing on March 3. The law took effect immediately and applies retroactively. 

Here's what employers need to know about the new law.

The Law's Purpose

In an arbitration agreement, employers and workers can agree in advance to have a neutral third party (an arbitrator) decide legal claims rather than suing in court. Arbitration is sometimes viewed as faster and more cost-effective than litigation.

Susan Eisenberg, an attorney with Cozen O'Connor in Miami, explained that an employee will generally file a claim in court and the employer will move to enforce an arbitration agreement that the employee signed (typically at the start of employment). Under the new law, however, employers can no longer compel arbitration for sexual-harassment or sexual-assault claims.

Supporters of the bipartisan Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act, H.R. 4445, said the new law lets workers and consumers with sexual-harassment claims decide how to pursue their claims. The law gives victims the choice to speak publicly about their experiences or resolve their claims in a private arbitration setting.

"This bill is one of the most significant workplace reforms in American history and is a major step forward toward changing a system that uses secrecy to protect perpetrators and silence survivors," said Sen. Kirsten Gillibrand, D-N.Y., who introduced the Senate version of the bill.

Arbitration Is Still an Option

"Employers should consider carving out sexual-harassment claims from their arbitration agreements, but the new law does not prohibit arbitration of these claims or an agreement to arbitrate them," noted Adam Sencenbaugh, an attorney with Haynes Boone in Austin, Texas. Under H.R. 4445, workers can still choose to arbitrate covered claims after the dispute arises.

"There are plenty of reasons that an employee might prefer arbitration," explained Amory McAndrew, an attorney with Hoguet Newman Regal & Kenney in New York City. "Employees are sometimes more comfortable with a smaller, more private forum as opposed to the very public court system."

Jessica Mason, an attorney with Foley & Lardner in Houston, noted that victims of sexual assault or sexual harassment may not always view the confidentiality of arbitration as a bad thing, so the law gives the person alleging such conduct the option to invoke the arbitration clause or invoke the law and proceed in court. "This gives complainants—but not employers—more control over the forum in which their dispute is heard," she said.

Which Claims Are Covered?

"Employers should keep in mind that the law applies to claims arising after the new law is enacted, even if the arbitration agreement itself was signed years ago," said Kevin White, an attorney with Hunton Andrews Kurth in Washington, D.C. In addition to individual claims, the new law renders class-action waivers unenforceable for sexual-harassment and sexual-assault claims.

Current claims that are already pending when the bill is enacted are not covered, Sencenbaugh noted. Therefore, the pre-dispute agreement to arbitrate them remains enforceable.

H.R. 4445 broadly clarifies that mandatory arbitration provisions are invalid and unenforceable for any case related to a sexual-assault or sexual-harassment dispute filed under federal, tribal or state law. "This means that employers with mandatory arbitration provisions may start to see claims of sexual harassment or sexual assault inserted into cases primarily concerning other protected categories or activities in an attempt to invoke the protections of the bill and nullify a mandatory arbitration provision as to the entire case," Mason noted.

Under the new law, courts (rather than arbitrators) must decide whether a dispute is a covered sexual-harassment or sexual-assault claim, regardless of whether an agreement delegates such decisions to an arbitrator.

Review Agreements

H.R. 4445 does not go so far as to invalidate a mandatory arbitration clause just because it is written broadly enough to encompass a sexual-assault or sexual-harassment dispute. However, Mason said, employers should still review their mandatory arbitration clauses and consider revising them to carve out such claims to minimize enforcement issues.

"Many employers have already amended their arbitration programs to carve out sexual-harassment and sexual-assault claims to comply with state laws," White said.

Some states, including California and New York, already ban mandatory arbitration of these claims, and some large companies have stopped enforcing arbitration agreements in such cases.

When reviewing workplace arbitration agreements, Eisenberg said, employers should ensure that they do not restrict employees' rights. The agreement is meant to cover a change in venue from court to arbitration and shouldn't limit the claims employees can file. Employers should also generally pick up the cost of arbitration, she said. An employee may have to pay a filing fee in court, but arbitration often includes additional costs, such as administrative fees and an hourly rate for the arbitrator.

What's Next?

"There has been talk for a long time about limiting arbitration agreements, and this is the first step," Eisenberg noted.

Congress could pass more limitations in the future by carving out race-discrimination and other claims, and some federal lawmakers want to ban pre-dispute arbitration agreements altogether. For now, the new law applies only to sexual-harassment and sexual-assault claims.