February 08, 2019 Practice Points

Kentucky Supreme Court Limits Enforceability of Arbitration Agreements in Employment Contracts

Court upholds Kentucky statute barring employers from conditioning employment on an agreement to arbitrate.

By Simon Svirnovskiy

Arbitration and other alternative dispute resolution clauses are not new. A typical arbitration provision may read something like this:

Any and all disputes and claims arising out of or relating to this contract, or any breach thereof, shall be settled by binding arbitration administered by the [arbitral body] in accordance with [applicable rules] and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.  The arbitration shall be governed by the laws of the State of [ ].

Beyond this, arbitration clauses are quite customizable and may vary as widely as the industries and businesses that use them.  A clause may or may not set the number of arbitrators on a panel, the way the panel is chosen, whether the arbitrator(s)’ award shall be issued in a reasoned opinion, the type of arbitration (split-the-baby or high-low), where the arbitration will physically be held, and whether and when appeal will be allowed. The various alternative dispute resolution providers also offer different sets of rules that parties may choose depending on their industry, sophistication, or the amount in dispute. 

More recently, employers have been asking, or sometimes requiring, their employees to sign arbitration provisions as a condition of employment or continuing employment. Employers often prefer arbitration because it is more difficult to assert a class claim, typically has more limited discovery provisions, and gives them (along with the employee) some control over selecting the arbitrator.

What Happened?

In Northern Kentucky Area Development District v. Danielle Snyder, No. 2017-SC-000277-DG (Ky. Sept. 27, 2018), the Kentucky Supreme Court held that employers may not require their employees to sign arbitration agreements as a condition of employment. Snyder’s employment agreement contained the following clause:

As a condition of employment with [NKADD], you will be required to sign the attached arbitration agreement . . . You may revoke your acceptance of the agreement by communicating your rejection in writing to [NKADD] within five days after you sign it.  However, because the agreement is a condition of employment, your employment and/or consideration for employment will end via resignation or withdrawal from the process. (Emphasis added).

During her employment, Snyder sued NKADD in Kentucky state trial court, asserting claims under the state’s Whistleblower Act and Wages and Hours Act. NKADD moved to enforce the arbitration agreement.  In response, Snyder argued that her arbitration agreement was void under Kentucky Revised Statute (KRS) section 336.700(2), which states that “no employer shall require as condition or precondition of employment that any employee or person seeking employment . . . arbitrate . . . any existing or future claim, right, or benefit.”

In turn, NKADD claimed that KRS section 336.700(2) was preempted by the Federal Arbitration Act (FAA), 9 U.S.C. section 1. Kentucky’s Supreme Court disagreed, holding that the FAA does not preempt KRS section 336.700(2) because the Kentucky statute does not actually single out or discriminate against arbitration agreements but, rather, just bars employers from conditioning employment on the employee agreeing to arbitrate. The court also reasoned that KRS section 336.700(2) was not an arbitration statute but, instead, an anti-employment discrimination rule that “uniformly voids any agreement diminishing an employee’s rights against an employer when that agreement had to be signed by the employee on penalty of termination or as a predicate to working for that employer.”

Why Was It a Surprise?

On its own, the decision appears to be a simple application of the statute—NKADD conditioned Snyder’s employment on her signing the arbitration agreement, and the statute prohibits precisely that. But the decision cannot be evaluated on its own. Until Snyder, KRS section 336.700(2) had been ruled unconstitutional when applied to employment arbitration agreements, as preempted by the FAA. This is precisely the argument that NKADD made.

Further, in Epic Systems Corporation v. Lewis, 138 S. Ct. 1612 (2018), the U.S. Supreme Court held that employers could require their employees to arbitrate disputes between them on an individual basis and to waive class and collective action litigation rights. In doing so, Epic expressly upheld mandatory arbitration agreements.

What Does It Mean for Litigators?

The question now is whether Snyder is the start of a counterattack on arbitration agreements or simply a one-off strike that will be disregarded or superseded by statute. Other federal cases have upheld, almost uniformly, the strength of arbitration agreements. See Kindred Nursing Centers v. Clark, 137 S. Ct. 1421 (2017) (because Kentucky’s clear-statement rule disfavored arbitration agreements, that rule was preempted by the FAA); American Express Co. v. Italian Colors Restaurant, 570 U.S. 228 (2013) (finding that Congress, through the FAA, requires courts to ‘rigorously’ enforce arbitration agreements according to their terms); AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) (FAA not only favors arbitration but also disfavors class proceedings). And, the Snyder ruling makes Kentucky the nation’s first state to prohibit mandatory employee arbitration agreements.

NKADD filed a petition asking the Kentucky Supreme Court to reconsider the decision. If that petition is not successful, NKADD may appeal to the U.S. Supreme Court. Until the decision is reversed or overturned, however, attorneys and employers in Kentucky, and perhaps elsewhere, should take notice. The one-way traffic in favor of arbitration in employment settings has been paused . . . at least for now.

Simon Svirnovskiy is an associate with Frost Brown Todd LLC in Cincinnati, Ohio.

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