Class Action Waivers Rob Workers of the Freedom to Negotiate with Their Employer

July 11, 2017
Guest Post

*This piece originally appeared on the Economic Policy Institute’s Working Economics Blog.

by Celine McNicholas, Labor Counsel, Economic Policy Institute

Yesterday, the Consumer Financial Protection Bureau (CFPB), an independent agency that serves as a watchdog for consumers, issued a rule that would ban companies from using mandatory arbitration clauses to deny Americans their day in court. The rule would restore consumers’ ability to band together in class-action suits. Without the ability to pool resources, many people are forced to abandon claims against financial institutions and other powerful companies. Consider that hundreds of millions of contracts for consumer financial products and services include mandatory arbitration clauses. Yet, The New York Times found that between 2010 and 2014, only 505 consumers went to arbitration over a dispute of $2,500 or less. By prohibiting class actions, companies have dramatically reduced consumer challenges to predatory practices.

Mandatory arbitration clauses are also used by employers. Employees are forced give up their right to sue in court and accept private arbitration as their only remedy for violations of their legal rights. Private arbitration clauses tilt the system in the business’s favor: the company is often allowed to choose the arbitrator, who will thus be inclined to side with the business; arbitration also cannot be appealed, leaving workers and consumers in much worse shape than if they had access to the courts. As such, employees who bring grievances against their employers are much less likely to win in arbitration than in federal court. Employees in arbitration win only about a fifth of the time (21.4 percent), whereas they win more than a third (36.4 percent) of the time in federal courts.

There is another important way that mandatory arbitration clauses rob workers’ of their rights: they require workers to handle workplace disputes as individuals – preventing workers from joining together with their coworkers to address workplace issues like sexual harassment at work. The National Labor Relations Board and several appellate courts have found that these agreements violate the National Labor Relations Act, which guarantees workers the right to join together to improve their terms and conditions of employment. This issue is currently before the Supreme Court.

Workers depend on collective and class actions to enforce many workplace rights. Employment class actions have helped to combat race and sex discrimination and are fundamental to the enforcement of wage and hour standards. Without the ability to aggregate claims, it would be very difficult if not impossible for workers to find legal representation in these matters. Few lawyers could afford to take individual wage claim matters. Class and collective actions are essential tools for workers to enforce their rights, and contracts that rob them of these tools are yet another way that working people’s freedom to negotiate with their employer has been undercut—and their wages have suffered as a result.