Class 12: Managing Employment Risks – Arbitration, Preemption, and Other Strategies

Summary of Core Topics: Class 12 addresses how employers and employees manage legal risks in the employment context, focusing on tools like mandatory arbitration agreements, contractual waivers, and how federal laws can preempt state efforts. One major topic is the rise of employment arbitration agreements – contracts that require employees to resolve disputes (like discrimination or wage claims) through private arbitration instead of going to court. We discuss the pros and cons: arbitration is usually faster and private, and often seen as employer-friendly (e.g., no jury, limited discovery). Employees may lose out on some aspects like broad discovery or class actions. We cover the legal enforcement of these agreements under the Federal Arbitration Act (FAA) – the Supreme Court’s strong support for enforcing arbitration pacts (e.g., Gilmer v. Interstate/Johnson Lane allowing arbitration of ADEA claims, and Epic Systems v. Lewis (2018) permitting class action waivers in arbitration agreements). 

We note exceptions: certain transportation workers are exempt from FAA, and recently the Ending Forced Arbitration of Sexual Assault/Harassment Act (2022) now gives employees the choice to go to court for those claims despite any arbitration agreement. We discuss the conflict between federal pro-arbitration policy and state laws: We highlight Illinois-specific risk management attempts: e.g., Illinois’ Workplace Transparency Act.

Non-compete agreements is another risk area: Illinois’ Freedom to Work Act (2021) now limits non-competes (bans them for employees under certain salary thresholds) and non-solicits for lower earners. We differentiate that from arbitration – non-competes manage risk of competition/trade secrets but carry their own legal risk (if overbroad, Illinois courts won’t enforce and new law imposes penalties). The class covers insurance as risk management: many employers carry Employment Practices Liability Insurance (EPLI) to cover discrimination or wrongful termination claims and we talk about the real value these offer for some claims but the fact that some (many) exclude wage claims and employers will end up paying their own punitive damages. 

Also, indemnification and releases: e.g., when terminating an employee, employers often offer severance in exchange for a release of claims – we discuss how that’s used to manage risk of lawsuits (with OWBPA 21/45 day rules for releases of age claims). We talk about litigation avoidance strategies: good documentation, employee handbooks with disclaimers (to avoid implied contracts), using probationary periods, etc. Also, social media and reputational risks – some mention of how employees’ online conduct can harm employers or vice versa, and how policies manage that (within legal limits like NLRA protecting concerted social media posts about work conditions). And from employee side, how to navigate these – e.g., can you negotiate out of arbitration, what happens if you sign a non-compete then find it void, etc. The class synthesizes many aspects in a practical risk management focus.

Hypothetical 1: Acme Corp requires all new hires to sign an arbitration agreement waiving any right to sue in court or bring class/collective actions. An employee later tries to join a class-action for overtime pay, but Acme points to the agreement. What will likely happen, and what should employees know before signing such agreements?

Model Answer: Given current law (post-Epic Systems), the arbitration agreement with a class-action waiver will likely be enforced. The employee would be compelled to arbitrate overtime claim individually, not participate in the class-action. Courts routinely uphold these agreements under the FAA, unless the agreement is unconscionable or the employee falls into an exemption (like a transportation worker). If this employee isn’t exempt, the class action will be barred. The court handling the class suit would likely exclude him and refer him to arbitration if Acme moves to compel arbitration. Employees should know that by signing such agreements, they are giving up the right to go to court (with a jury, public record, etc.) and the right to band together with others in a class. Instead, disputes will be decided by a private arbitrator, one-on-one. On the other hand, arbitration might resolve faster, but statistically employees win less often and get smaller awards in arbitration (and they usually can’t appeal an arbitrator’s bad decision easily). 

From Acme’s perspective, this manages risk by avoiding class actions (no big collective liability) and possibly more favorable forum. There are some limits: for example, if this were a sexual harassment or assault claim. But for overtime (wage/hour), no such exception – arbitration stands. Also, if an agreement is poorly drafted (e.g., doesn’t cover certain claims clearly, or tries to make the employee pay high fees), a court might not enforce those parts. But properly drafted ones like Acme’s are generally upheld. So likely outcome: the employee must arbitrate individually. Employees should be aware of this at hire (though refusing to sign might not be an option if it’s mandatory for the job). Some states (not Illinois currently) tried to ban mandatory arbitration – but FAA preemption overrides that, so it’s enforceable in IL. In summary, Acme’s arbitration clause is an effective shield against class suits, and employees need to know it affects their litigation rights significantly.

Federal vs. Illinois Law: This class is inherently about interplay. Arbitration: Federal law (FAA) dominates – Illinois cannot override it for most employment contracts. Illinois did pass the Workplace Transparency Act requiring certain fairness in arbitration agreements (like they must allow discussing claims with officials or attorneys, etc.), but it also says it’ll be enforced only to extent not inconsistent with FAA. So Illinois acknowledges federal supremacy there. Non-competes: mostly state law territory. Illinois has its own rules (and if a contract chooses Illinois law, those apply). The federal government historically had no general non-compete law, but the FTC attempted one.

Employer Perspective: For employers, Class 12 is basically the playbook on limiting liability exposure. Employers have embraced arbitration agreements to avoid juries and class actions – it’s a conscious strategy to reduce the unpredictability of big verdicts (like a jury might give a million for emotional distress where an arbitrator might give far less, or none). 

Using releases in severance is standard practice to close out potential claims, and employers will calibrate severance amounts based on litigation risk (higher risk of claim => higher pay to get release). 

Employers often use insurance to budget for the unexpected – but also know insurance might come with high deductibles. Preemption is a friend to multi-state employers: they prefer uniform federal rules (hence support for FAA arbitration uniformity, ERISA uniform benefits, etc.) to avoid 50-state compliance burdens. So risk management sometimes involves structuring things to fall under protective federal umbrellas (like classify bonus plans as ERISA plans, or ensure your arbitration is under FAA). In sum, from an employer side, this class’s content is about being savvy in contract and policy design to minimize legal entanglements and potential large liabilities.

Employee Perspective: Employees often don’t realize these agreements or clauses can significantly affect their rights until an issue arises. From their perspective, it can feel unfair: e.g., you can’t sue in court or join with coworkers in a class if something wrong happens at work – many employees sign these at onboarding with little choice or understanding. Awareness is key: an employee might try to negotiate it (rare, but high-level execs sometimes carve themselves out of arbitration, or at least ensure it’s mutual and fair). For non-competes, employees should carefully read and possibly negotiate; Illinois now mandates the 14-day review, so use that time – maybe consult a lawyer if the non-compete could really hinder future job prospects. For those already bound by an arbitration or non-compete, they should know the limits: e.g., even if you signed an arbitration clause, you can still file a charge with EEOC or NLRB – the clause typically doesn’t stop the government from pursuing action or you from cooperating; it just stops you from an individual court lawsuit. Also, the new law gives you an out for harassment/assault cases – so if something like that happens, you can take it to court if you prefer (the employer can’t enforce arbitration for those if you opt out).

For non-competes, if someone below the salary threshold is still given one, know that it’s likely unenforceable under Illinois law, but an employee might still abide out of fear. They could consult an attorney to confirm and perhaps push back or have new employer’s counsel send a letter. Another advice: employees should keep copies of any agreements they sign – it’s frustrating when an issue arises and the employee doesn’t have their arbitration agreement or non-compete to review. Also, if severance is offered with a release, they should realize they don’t have to accept – it’s voluntary, but then you lose the money. They should evaluate if they have a strong legal claim vs. the certainty of severance. 

Also, realize even if you sign a release, you can still go to EEOC (but you can’t get personal relief). And some rights can’t be waived – for instance, you always can file claims with law enforcement or governmental agencies; an employer can’t properly make you sign that away. In short, employees should approach these risk tools with open eyes and, when possible, seek legal advice. Many employees don’t, unfortunately, due to cost or trust that the company is fair; but given what’s at stake (like ability to work in your field if a non-compete enforces, or ability to publicly talk about your harassment experience), it’s worth that consultation. Public policy is slowly shifting to limit the harshest of these measures (like low-wage non-compete bans, arbitration carve-outs). So employees also have an interest in supporting legislative or legal changes that recalibrate the balance if they feel it’s too employer-skewed.

Drafting Assignment:  Draft an arbitration clause for an employer who wants to avoid class action lawsuits.

Practical Tips and Takeaways:

• Read Before Signing: This may sound basic, but many employees sign stacks of onboarding documents electronically without reading. Take the time to read arbitration clauses, non-competes, etc. If you see something concerning, ask HR about it – maybe they have some flexibility (sometimes they might waive a non-compete for a certain candidate who pushes back, especially in tight labor markets for talent). Employers, provide these documents upfront (even offer them pre-offer for review) so candidates don’t feel ambushed on day one; that transparency can build trust and avoid later claims of surprise or unconscionability.
• Consult a Lawyer for Important Contracts: If you’re leaving a job and asked to sign a separation agreement, or if you plan to start a new job but have a non-compete hanging over from old job, those are prime times to get legal advice. Many lawyers will do a consultation for a relatively modest fee to explain your rights and options. Employers, on the flip side, should have attorneys review their agreements to ensure they comply with latest laws (e.g., Illinois’ new requirements on non-competes, OWBPA on releases, etc.) – outdated templates can cause agreements to be invalid.
• Stay Informed of Changes: The legal landscape on these issues is evolving. E.g., the new federal arbitration carve-out (2022) – HR departments had to update arbitration agreements to reflect that (some now explicitly state “this agreement does not apply to claims of sexual harassment/assault, which you may choose to bring in court per federal law”). Illinois employers updated non-competes usage in 2022 per new law. Being behind can mean inadvertently breaking the law or losing the protection you thought you had (an unenforceable non-compete is worthless, and an arbitration agreement that fails fairness might be struck down).
• Insurance and Compliance: Employers with EPLI or similar should know the terms – sometimes notifying the insurer early about a claim is required to maintain coverage. Also, insurance might require using certain arbitrators or mediators to minimize costs. On the employee side, if you sue and the employer has insurance, settlement might be easier since insurer foots bill (but insurer might also push back if they think claim is defensible). For risk management, combining approaches is wise – e.g., an employer uses arbitration AND has insurance as a backstop. But note: some egregious acts (punitive damages for intentional wrongdoing) might not be insurable by law. So best risk management is not to engage in egregious acts in first place.
• Balancing Culture vs. Contracts: Employers should recognize that relying solely on legal contracts to manage every risk can create a culture of legalism that might harm employee relations. For example, making all new hires sign strict NDAs about everything might prevent negative social media posts, but it can also chill genuine concerns and create distrust. It might be better to address root causes (e.g., improve manager training to reduce discrimination rather than just bank on arbitration to quietly deal with it if it arises). In other words, legal risk management tools are last lines of defense; the first line is treating employees fairly to avoid disputes. If you find yourself leaning on enforcement of a harsh non-compete to keep someone from leaving, consider what could have been done to make them want to stay (better pay, growth opportunities). That’s a more positive risk management in the long run.
• Employee Strategies Under Constraints: If you’re bound by arbitration, you can still leverage some pressure by filing with agencies (EEOC, DOL) because those can investigate and even sue employers (the EEOC is not bound by your arbitration agreement). Similarly, if you have coworkers with the same issue, even if you can’t formally file a class, you all can file separate arbitrations (some companies now face “mass arbitration” where hundreds of individuals file – ironically costing the company a lot in arbitration fees; some companies then settle globally). This is happening with some gig companies. So employees do have ways to assert rights collectively even around arbitration. And some arbitration clauses have opt-out provisions (rarely highlighted by employers) – if yours did, and you’re within the window to opt out, you can and still keep your job. Always look for that. If none, legislative changes may help eventually.

Class 12 thus provides a nuanced understanding that managing legal risk is a dynamic interplay of contracts, laws, and strategy – both sides must adapt to shifting rules and maintain both compliance and fairness. Companies want predictability and reduced litigation costs; employees want their substantive rights and day in court. The law is continually striking that balance, and right now leans toward enforcing agreements but with emergeng carve-outs to protect individuals in the most sensitive areas.