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Mandatory Arbitration and Class Action Waivers for Sexual Harassment or Sexual Assault Prohibited in Any Pre-Dispute Agreement

We often encounter model employment contracts that have not been revised for years, even decades, in the practice of employment law. This can negatively impact the enforceability of employment contracts, particularly with respect to non-competition, non-solicitation and non-disclosure clauses, as state laws (either court statutes or statutes) are constantly changing. In recent years, some state laws have evolved to prohibit binding arbitration agreements relating to labor disputes.

Now, all employers, regardless of location, must review their employment contracts to determine the potential impact of pending federal legislation. Earlier this month, Congress passed HR 4445, “Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 (the “Act”), which, when signed by the President, will immediately prohibit compulsory arbitration disputes involving sexual assault or sexual harassment Although the law applies to all agreements, this law has a greater impact on employment-related agreements.

Specifically, the law prohibits:

  1. Any agreement to arbitrate a sexual assault or sexual harassment dispute where such dispute has not yet arisen; and
  2. Any agreement prohibiting or waiving either party’s right to participate in a joint, class or class action regarding a sexual assault or sexual harassment dispute while such dispute has not yet arisen.

Key takeaways from the law include:

  • The law defers to state, federal and tribal laws.
    Although the law is a federal law applying to all individuals (and employers), the prohibitions are not limited to Title VII and extend to disputes arising from state and tribal laws. The law defines sexual assault as a non-consensual sexual act or sexual contact, as defined in 18 USC § 2246 (the federal law criminalizing sexual abuse) or similar applicable tribal or state law. The law even more broadly defines sexual harassment as conduct that is presumed to constitute sexual harassment under applicable federal, tribal, or state law.
  • The agreement to waive a jury trial is not discussed.
    The law explicitly prohibits a pre-litigation waiver to participate in any joint, class, or collective action regarding sexual assault or harassment, suggesting that a pre-litigation agreement (i.e., employment contract) could include a provision waiving the rights of the parties to request a jury trial. Note however, that North Carolina employers (and anyone in the state, for that matter) cannot require a jury trial waiver as part of a contract. (See NC Gen. Stat. § 22B-10)
  • Employers could keep optional arbitration clauses.
    The law provides that the person alleging sexual abuse or sexual harassment can choose to declare binding arbitration or the waiver of joint action provisions unenforceable. Thus, employers could amend their employment contracts to remove language requiring arbitration or waivers while allowing the employee to opt in to arbitration.
  • Agreements entered into previously are not exempt from the prohibitions of the Act.
    The Act applies to any dispute or claim that arises or accrues from the date of enactment of the Act. Accordingly, any mandatory arbitration clause or waiver of joint action may be waived at the employee’s option upon the filing of a complaint of sexual assault or sexual harassment, regardless of when the employment contract underlying has been signed.

Practical considerations for employers:

  • Once President Biden signs the law (as expected) and it becomes law, employers must modify any employment contract with a mandatory arbitration clause or joint action waiver clause.
  • Although the text of the Act suggests that the entire agreement will not be invalid or unenforceable because of the inclusion of a prohibited provision, employers should be proactive in modifying the enforcement provisions. Specifically, since arbitration will be voidable by the person seeking a claim of sexual harassment or sexual assault, the agreement should include venue-of-court provisions relating to such claims.
  • Employers could choose to simply add a provision specifying that the mandatory arbitration and/or joint action waiver clause does not apply to claims of sexual harassment or sexual assault. However, employers should consider whether maintaining these provisions will be more of a long-term barrier. Consider the following:
    • Arbitration is a private, binding process that does not involve any court or public court system, which can greatly benefit employers by having more control over the dispute process.
    • There are also potential downsides to arbitration for employers, such as substantial administrative and arbitration costs that are entirely paid for by the employer under some arbitration rules; the risk that the employee will challenge the enforceability of the binding arbitration clause; the reluctance of arbitrators to grant deeming motions thereby allowing the case to proceed to hearing; the possibility of having less experienced arbitrators with or less inclined to accept procedural defenses such as statutes of limitations or to reject evidence based on relevance or hearsay; and the very limited possibility of successfully appealing an arbitral decision.
    • Private arbitration does not preclude administrative agencies (such as the Department of Labor or the Equal Employment Opportunity Commission) from investigating and prosecuting employers.
  • To make changes to employment contracts, whether through a new agreement or an addendum, employers must ensure that they provide adequate consideration to form a valid contract. This varies depending on state law, but North Carolina employers should note that the execution of any new agreement with restrictive covenants (i.e. non-competition) or modification of covenants in an agreement requires consideration beyond continued employment.

We will provide a brief update once the law comes into effect. In the meantime, employers should seek legal advice on what changes, if any, to your employment contracts. After all, the law changes almost every day!

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