Arbitration Clauses in Employment Contracts – Are They Enforceable?
In 1925, in an effort to raise arbitration agreements to the same level as other contracts, the Federal Arbitration Act was passed, which set forth a national policy in favor of arbitration. And yet, for the last eighty-two years, arbitration agreements between employers and employees have remained a controversial area of law across the country.
In a 2001 decision, the U.S. Supreme Court held that the Federal Arbitration Act did not apply to employment contracts of transportation workers. This decision concluded that states were allowed to establish laws regarding arbitration agreements in the employment context, so long as they were consistent with the federal policy favoring arbitration.
The Arizona Arbitration Act was enacted in 2003. Though the Act favors arbitration overall, it excludes applicability to arbitration agreements between employers and employees. The specific language provides that the Act “has no application to arbitration agreements between employers and employees or their respective representatives.”
The Arizona Supreme Court interpreted the scope of the Act in North Valley Emergency Specialists v. Santana, addressing the question of whether all employment contracts were exempt from the Act or just collective bargaining agreements.
In North Valley, a group of physicians and assistants who worked for Team Physicians of Arizona, Inc., left to form a competing company. While working for Team Physicians, they had signed an arbitration agreement. Team Physicians later sued them, and claimed that the cases must be submitted to arbitration pursuant to the agreement. The defendants refused to arbitrate, claiming the Arizona Arbitration Act exempted employment contracts from arbitration. The trial court found in favor of Team Physicians, holding that the provision only applied to collective bargaining agreements. Then, the Arizona Supreme Court overturned their decision, holding that:
“…the clear language of [the Arizona Arbitration Act] leads us to conclude that an arbitration agreement between an employer and employee is not subject to the provisions of the Act, whether the agreement is found in a contract between a single employer and a single employee or in a collectively bargained contract.”
The impact is that all employer-employee arbitration agreements are unenforceable in Arizona, via the Arizona Arbitration Act. Although seemingly straightforward, this case left open the possibility for employment arbitration agreements via two potential enforcement mechanisms.
The first possible mechanism is common law. The Arizona Supreme Court declined to address whether a party may enforce employment arbitration agreements through contract law, rather than relying on a statute.
The second possible mechanism, and the source of much controversy surrounding the decision, is the Federal Arbitration Act. Many critics of North Valley argue that it contradicts the U.S. Supreme Court’s decision on the broad scope of the Federal Arbitration Act. They also contend that the Arizona Supreme Court has directly violated a different U. S. Supreme Court’s ruling, prohibiting a state court from upholding statutes which invalidate arbitration agreements.
Until the Arizona Supreme Court is given an opportunity to consider one of the other enforcement mechanisms, or until the decision is appealed to the U.S. Supreme Court, arbitration agreements are likely unenforceable in Arizona. Employers may decide, nevertheless, to include such provisions, based on the possibility that the law will change upon further review.
For further information, also read “Enforceability of Arbitration Agreements” by Sara C. Derrick.