Even as the #MeToo movement has shone a spotlight on sexual harassment, discrimination and other wrongdoing, companies have been able to limit their risk by mandating that disputes between employees and employers be pursued through arbitration. But a new law passed by Congress earlier this month could change the equation by giving more power to employees who allege sexual misconduct in workplaces.

More options for employees

For nearly a century, the Federal Arbitration Act (FAA) has allowed employers to specify — through pre-dispute arbitration agreements in employment contracts — that a variety of employment disputes be handled via arbitration rather than in courts. The FAA and a number of supporting court decisions have helped employers enforce such agreements, thereby largely avoiding the financial harm of jury verdicts and settlements as well as reputational harm by keeping such disputes out of the public eye.

The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 means that pre-dispute arbitration agreements are no longer ironclad. The act empowers employees to nullify such agreements in instances when an employee dispute involves an allegation of sexual assault or harassment in the workplace.

Once signed by President Biden, the act will take effect immediately and will apply to any pre-dispute agreement entered into prior to the law’s enactment. Its retroactive effect, however, is limited to disputes involving alleged conduct constituting sexual harassment or assault occurring after the law is enacted. Currently pending claims can still proceed in arbitration.

Importantly, the new law specifies that only a court — and not an arbitrator — can decide whether an arbitration clause falls under the law’s prohibition. The act applies to individual actions as well as class and collective actions.

Employees, however, can still elect to resolve sexual harassment and assault claims via arbitration in cases when an agreement to arbitrate arises after a dispute occurs and such agreement is in writing.

Potential implications for employers

For at least some employers, the law may have significant effects.

Although defense costs may not substantially increase as more cases move from arbitration to litigation, employers now face the prospect of potentially large jury verdicts and settlements. It’s also important to note that while the arbitration process is typically not public, court proceedings are.

The new law could also have adverse effects on the insurance market. Since the emergence of #MeToo — and an accompanying rise in claims alleging sexual assault, harassment, and discrimination — employment practices liability (EPL) insurers have pushed for higher retentions in policies, particularly in jurisdictions where verdict and settlement amounts tend to be substantially higher, such as in California. The possibility of more claims being litigated in court instead of arbitration could make the market more difficult for EPL insurance buyers.

At least one important question, however, remains pending: How will courts handle litigation that alleges claims for sexual assault and harassment along with other unrelated claims? Will they be split between court and arbitration? Will they be litigated together in court? Only time will tell.

Moving forward

The spotlight on sexual misconduct is not likely to fade anytime soon. And the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act puts even more pressure on employers to approach allegations of workplace misconduct with care.

Employers should consult with in-house and outside employment counsel on the new law’s implications. Among other actions, it may be prudent for employers and counsel to review and revise mandatory arbitration agreements in employment contracts to ensure they are consistent with the requirements of act.

Several states as well as New York City now mandate sexual harassment prevention training for employees. Even employers operating in other jurisdictions should consider engaging in sexual harassment training and education for their workforces, which may help to prevent some claims from arising.

Risk professionals should be ready for greater scrutiny from EPL underwriters. They can also work with experienced insurance brokers to understand the potential implications of the new law on their risk profiles and the insurance marketplace, and to prepare for upcoming renewals.

For more insights and information, contact your Lockton broker.

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