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Corporate America's Oily Trick: How Big Business Uses "Yellow-Dog Contracts" to Crush Basic Rights

Your job contract or cellphone agreement could have secret language that ruins your life. Here's how it works

Public Citizen

This month, the Equal Employment Opportunity Commission (EEOC) announced that it is suing a regional restaurant group that owns a number of fast-food franchises, including Applebee’s, Panera Bread and Chevy’s, because the group requires all of its employees and applicants to sign a “forced arbitration” clause as a condition of employment – that is, if these employees want to work in the group’s restaurants, they must sign away their right to hold their employer accountable in court for violating state or federal employment laws.

The EEOC’s efforts are admirable, but they address a tiny portion of a much bigger problem.  These hidden forced arbitration clauses lurk behind many of the most brutal injustices facing consumers and workers.  For example, a court in Texas recently held that a woman who washed dishes at a fast food restaurant could not sue in court for damages from personal injuries she sustained on the job.  The problem had nothing to do with her argument that she’d been treated unfairly; the problem was that her employee handbook had contained a forced arbitration agreement that dictated that her claims were to be decided by a private arbitrator.

We’ve faced problems like this before. In the early 20th century, American corporations frequently required their workers to agree not to join together in a union to seek higher wages or better working conditions.  The choice wasn’t whether or not to waive your rights, but whether you wanted a job — and that wasn’t much of a choice at all. Commentators at the time referred to these agreements as “yellow-dog contracts,” because they “reduced to the level of a yellow dog” every person forced to sign them.  The contracts were not the result of free and equal bargaining between workers and their employers.   Rather, they effectively forced employees to sell themselves into indentured servitude.   With the Norris-LaGuardia Act, Congress preserved workers’ dignity and restored the freedom to contract.

Recently, a series of Supreme Court decisions have made forced arbitration agreements a new kind of “yellow dog contract.” Buried in the terms and conditions of cellphone contracts, credit agreements, school enrollment forms, nursing home contracts and employment contracts in non-union workplaces, forced arbitration clauses require consumers and employees to give up their constitutional right to a jury of their peers as a condition of keeping their job or buying goods from a company. (Through the collective bargaining process, unionized workers have the advantage of negotiating over an arbitration agreement.)

Although claims forced into arbitration — unlike claims filed in court — are generally secret, we know about forced arbitration agreements because so many merchants and employers have inserted them into the fine print of boilerplate contracts we see every day.

We know that despite assurances from corporations that arbitration is faster and quicker than litigation, forced arbitration agreements often require consumers and non-union employees to pay arbitration fees that are much higher than the filing fees they would have to pay to file a claim in court.

We know that the vast majority of consumers and non-union employees are prevented from vindicating their rights because forced arbitration clauses prevent them from pooling their resources in a class or collective action, thus allowing companies to violate the law with impunity.

We know that arbitrators who handle claims under these forced arbitration clauses, who are paid hundreds of dollars by the hour, have a financial incentive to rule in favor of corporations to keep getting work from the companies whose arbitration clauses designate them to decide claims.

And we know that these agreements, like the “yellow-dog contracts” of the early 1900s, aren’t agreements at all.  They are the price of being a consumer or non-union worker in 21st century America.

The legalese in the “Terms & Conditions” we absentmindedly accept online and the dense language of the employee handbooks given to us on the first days of jobs in non-unionized workplaces aren’t bargained for after negotiation as contracts should be. This language is developed by lawyers in office buildings behind closed doors. Recently it came to light that, in the late 1990s, the major credit card companies came together to form a secret “arbitration coalition” designed to create ways to force consumers to waive their rights to file claims in court. When credit card companies changed the terms of their card agreements to effectively insulate themselves from liability for wrongdoing, consumers were left without a choice. They could either waive their rights or give up their credit cards.

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Voluntary arbitration can help resolve some disputes, but consumers and employees should have the opportunity and right to make this choice for themselves. Recently, President Obama signed an Executive Order allowing employees of large federal contractors to voluntarily decide whether they want to submit their sexual harassment or discrimination claims to private arbitration. The CFPB can do the same for consumers of financial products, the Security Exchange Commission for some investors, and the EEOC can help tackle the clauses in employment agreements.  Congress can simplify things by giving all employees and consumers the right to voluntarily decide whether they want to arbitrate disputes.

The freedom to contract is one of the bedrocks of our society. Let’s take it back by stopping forced arbitration.

David Seligman is a staff attorney at the National Consumer Law Center (NCLC), one of the nation’s leading nonprofit advocacy organizations dedicated to advancing consumer justice and economic security for low-income and other disadvantaged people.


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Nicholas W. Clark is the general counsel for the United Food & Commercial Workers International Union, Washington, DC, where he has practiced labor and employment law since 1984.


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