Legal View: Arbitration clauses in employment contracts: Are yours enforceable?

By Barbara Grzincic
The Daily Record Newswire

As summer gives way to September, it’s time for a little homework. Your assignment: review the arbitration clauses in your company’s employment contracts.

Two events this summer necessitate such a review. First, the Dodd-Frank Wall Street Reform Act did more than just create the Bureau of Consumer Financial Protection. It also increased the rights of whistleblowers, giving them more time and a monetary incentive to report violations of the Sarbanes-Oxley Act — and better protection against retaliation if they do.

Second, there’s the curious farewell note from Ronald Meisburg, outgoing general counsel of the National Labor Relations Board, written just days before he decamped to the Proskauer Rose law firm in June.

In a memo to the NLRB’s regional directors, Meisburg attempted to reconcile the National Labor Relations Act’s protection of employee class-action rights with Supreme Court rulings that back the employers’ right to insist on arbitration.

The Dodd-Frank Act
Under the reform law, the time in which employees may report a SOX violation has at least doubled. Prior law cut off such claims 90 days after the alleged violation. Under the new law, employees have 180 days from the time they become aware of an alleged violation, regardless of when the incident actually occurred.

Also, whistleblowers who provide “original information” to the SEC or the Commodity Futures Trading Commission are now eligible for a monetary award if the company is fined $1 million or more. While the regulations are not yet in place, it is expected that 10 to 30 percent of the recovery could go to the whistleblower.

Although employees still do not have a private cause of action to enforce SEC violations, they do have a right to sue if an employer retaliates against them for protected activities, such as providing information to the SEC or participating in an SEC investigation. Those suits can be brought in federal court without having to bring an administrative action.

If you think your arbitration clauses can handle all these beefed-up rights, think again.

Dodd-Frank makes it clear that employees cannot be forced to waive any rights or remedies under SOX “by any agreement, policy, form, or condition of employment.”

Also, any pre-dispute agreements to arbitrate SOX claims are expressly made unenforceable.

Meisburg’s missive
The second reason to look over your employment contract’s arbitration clause comes from General Counsel Memo 10-06, Meisburg’s missive to the NLRB’s regional directors. While it is not binding, it does represent the agency’s highest-level interpretation of an apparent dichotomy in the law.

As Meisburg noted, Section 7 of the National Labor Relations Act protects the right of employees — not just those in a union shop — to engage in concerted activity and to be free from retaliation for asserting employment rights in court. The NLRB and courts alike have said that includes the right to pursue a class action.

On the other hand, the Supreme Court has held that employers may require workers to arbitrate matters that are not related to NLRA rights. (Such agreements are sometimes called Gilmer agreements, after the Supreme Court’s ruling in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991),

Starting from those two principles, Meisburg added two more:

Mandatory arbitration agreements (and related documents) may not use “language so broad that a reasonable employee” could read the agreement as conditioning employment on the waiver of Section 7 rights, including the right to file a class action.

Employers can still require mandatory arbitration for individual, non-NLRA rights, so long as the distinction is clear to a “reasonable employee” reading the clause. An employer can even seek dismissal of a class action on the ground that each class member has signed a lawful   arbitration agreement, Meisburg said.

“In sum, if mandatory arbitration agreements are drafted to make clear that the employees’ Section 7 rights to challenge those agreements through concerted activity are preserved and that only individual rights are waived,” Meisburg wrote, then the NRLA does not bar an employer from “making and enforcing an individual employee’s agreement that his or her non-NLRA employment claims will be resolved through the employer’s mandatory arbitration system.”

Again, GC Memo 10-06 is not binding and its author is no longer in the GC chair; Meisburg’s interim successor, Lafe Solomon, had yet to weigh in on the question as of this writing. Nor is the “reasonable employee” standard anything close to a bright line.

However, it does provide a framework for evaluating the arbitration clauses in your employment contracts.

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