Employee Arbitration Clauses and Protecting Your Startup in an Uncertain Legal Landscape

Many in the general workforce see working for a startup company or newly founded venture as a “hot” career move, sitting at their desks pondering such a move as they work for large, traditional companies with structure akin to your everyday Fortune 500 company. Making the switch to a startup often comes with the excitement of building a business, the freedom and culture associated with the workplace or simply the feeling of becoming part of something “larger” than yourself. However, there are also great risks an employee takes when pursuing such a career move.

 

The Issue 

In many cases, startups lack the ability to comply with a vast number of legal regulations, commonly in the labor and employment area. Employees might lose the feeling of security on matters that are normally handled by large HR departments within a large, established company. For example, where an HR department might handle the calculation of how much overtime pay a given employee is owed, a task like this might slip through the cracks at a startup in which creating a minimum viable product is the focus.

Currently, worker classification issues are plaguing startup companies like Uber and WeWork on matters ranging from underpaying employees to simply not providing statutorily mandated benefits. Some early-stage startups view noncompliance with labor and employment regulations as a small issue when compared to the hurdles that must be overcome to get a business up and running, but these seemingly small issues can destroy a company at later stages due to costly liabilities for workplace disputes and employee lawsuits.

 

The Possible Solution

In response, many startups turn to what they hope is a safeguard against large-scale employer liability for labor issues: employee arbitration clauses that bar collective or class-action suits. One New York Times headline from 2016 reads, “Start-Ups Embrace Arbitration to Settle Workplace Disputes”; from a general survey of the start-up scene, the Times is spot on. Early-stage companies are increasingly including arbitration clauses in their employment agreements that bar employees from taking collective action against their employer in a civil court, instead forcing individual arbitration requirements. From an employer’s perspective, this removes the incentive that employees normally have to bring disputes to arbitration or civil court in the first place because the cost of doing so individually likely outweighs whatever damages an employee may be awarded for back pay or improper benefit plans. However, employees may resist these clauses, and they may attract unwelcome press attention.

So, if employee arbitration clauses banning class action disputes provide some protection to startups, why are we even talking about this? As happens with many contractual devices providing corporations and employers with an advantage in a bargaining context, a number of plaintiffs launched legal challenges to the overall validity of employee arbitration clauses that bar class action suits. In January of 2017, the Supreme Court decided to consider a group of related cases concerning whether arbitration agreements containing class action waivers violate employee rights under the National Labor Relations Act (NLRA) in order to resolve a federal circuit split on the issue. Thus, come Fall 2017, that tool for protecting your startup from large-scale liability might be removed from your toolbox altogether.

Why might the Supreme Court find these class action waivers are invalid?

  • The NLRA, a federal statute applicable in all states, protects employees’ rights to engage in “concerted activity” to improve wages or working conditions
  • The National Labor Relations Board, responsible for enforcing the NLRA, has issued decisions that hold agreements between employers and employees to handle disputes exclusively on an individual basis violates employee’s rights to engage in “concerted activity”

What does this mean for your startup?

  • Until the Supreme Court hands down a decision on this issue, arbitration clauses with employee class action waivers may still be considered enforceable from a legal perspective, depending on where the company is located
  • Regardless of the Supreme Court’s decision, the best way to avoid liability for labor disputes remains complying with the applicable labor laws and regulations whenever and wherever possible
  • If the Supreme Court rules that these waivers are unenforceable, it becomes even more important to comply with applicable labor laws and regulations because large-scale liability for employee disputes is far more likely if collective action is available
  • If the Supreme Court rules that these waivers are enforceable, the status quo remains, but it only means that the likelihood of facing large-scale liability in employee disputes is lower than it would otherwise be

What should you do from here?

  • Review current employment agreements and evaluate whether or not any provisions in the agreement might constitute an employee waiver to class action disputes (e.g., binding arbitration clauses)
  • Consult an attorney who is familiar with labor and employment law and inquire about ways to mitigate risk in this area
  • If the Supreme Court rules these waivers are unenforceable, remove such terms from your employment agreements for clarity and to avoid disputes concerning the validity of the other terms in an employment agreement
  • If the Supreme Court rules these waivers are enforceable, consider using them when drafting current and future employment agreements in order to protect your business from large-scale liability