At the beginning of 2023, the Federal Trade Commission proposed banning non-compete agreements for all workers in the United States – potentially staving off the creeping advance of these clauses in worker contracts of all kinds over the past decade. The stakes are high, with the FTC estimating that the new rule could impact 30 million Americans and boost wages by $300 billion per year. 
Non-competes are often paired with arbitration clauses, which together contribute to an employment landscape increasingly stacked against workers – making it challenging for workers who want to change jobs and for those who are wrongfully terminated by their employer. Under forced arbitration clauses when an employee has a dispute with an employer, cases are not heard by a jury but resolved in private by arbitrators, producing decisions hidden from public view, immune from being appealed, and effectively prohibiting class-action lawsuits. 

In this Economic Update, Terri Gerstein, Director of the State and Local Enforcement Project at the Harvard Law School Labor and Worklife Program, discusses why the issue of forced arbitration is central to the issue of worker power and workplace protections. Before assuming her current role at Harvard Law School, Gerstein was previously labor bureau chief in the New York State Attorney General’s Office and a deputy commissioner in the New York State Department of Labor. Here, Gerstein discusses how forced arbitration encourages misclassification of ‘independent contractors’ and how the burden for acting has fallen to states to lead the way.

Center for New York City Affairs: The employment landscape is increasingly stacked against workers, with forced arbitration and non-compete clauses, making it difficult for workers to change jobs and pushing disputes about alleged violations of workers’ rights out of the court system. Why has forced arbitration – and also class action waiver clauses, which put workers on their own when suing employers – grown increasingly common in recent years?  

Terri Gerstein: It’s because the Supreme Court has repeatedly given their blessing to forced arbitration and to the employer practice of requiring workers to waive their right to bring a class action. Supporters of arbitration claim that arbitration is better for workers because it’s more informal and faster. But in practice, it’s used to deprive workers of the right to have their cases heard. 

 The biggest result of the spread of forced arbitration is that minimum wage, anti-discrimination, and wage theft cases aren’t being brought in the first place. Research by NYU law professor Cynthia Estlund has looked at otherwise comparable employers who didn’t use forced arbitration and those who did, and compared the number of employment cases filed in court versus filed in arbitration. The number of arbitration cases was minuscule. 

CNYCA: What was the Epic Systems case and why was it important?

 TG: It was a case in which the Supreme Court held that requiring workers to waive their right to bring a class action did not violate the National Labor Relations Act, which gives workers the right to take collective action. With class action suits, one or a handful of workers file on behalf of a class, and then other potential class members are notified, expanding the number of claimants. Restricting class action suits limits employer liability and minimizes the possibility employers will have cases brought against them. It’s a very effective way of limiting company liability. 

CNYCA: So this means wage theft cases, for example, would have to be filed by individual workers, rather than groups of them, making it more difficult to win large settlements or exact penalties that would discourage companies that are repeat offenders.  

 TG: That’s right. The current structure creates many barriers for workers to get justice, and lowers disincentives for employers to violate the law. For example, it’s hard for workers to find lawyers to bring individual cases in arbitration. Since forced arbitration clauses are often paired with class action waiver clauses, and individual wage theft cases don’t result in big settlements, the economies of scale are often not there. While forced arbitration does not constrain public enforcers like State AG’s or labor departments, these agencies generally have severely limited resources. As a result, often, forced arbitration allows employers to violate workers’ rights without facing consequences. And even if a case is decided against an employer, the findings are secret, so these disputes almost never see the light of day.  

CNYCA: And workers don't really have a lot of power to refine their contracts; a low-wage worker can’t look at a contract and say, ‘I don’t like this part of the deal.’ In fact, I can’t imagine many workers have any leverage at all to change their contracts.

 TG: That’s right. To be clear, the lowest-wage workers, who are working in the underground economy, often don't have employment contracts or agreements at all. But low-wage workers or even middle-wage workers who have these clauses in their contracts do not have the ability to negotiate over the terms. Only very high-ranking or highly paid workers will have the ability to negotiate specific terms. For most, it’s: Take it or leave it if you want this job.

CNYCA: The Forced Arbitration Injustice Repeal Act (FAIR Act) passed in the House last year, but with Democrats losing control of the House, it seems that federal avenues are closed. What do you think the states can do to make progress on outlawing mandated arbitration illegal for any kind of workplace dispute?

 TG: I think it's incredibly important to end the practice of requiring workers to give up their right to go before a judge. A federal law passed earlier in 2022 ended forced arbitration in cases of sexual harassment at work. The same logic of why it's important to do that in relation to sexual harassment applies to cases of wage theft, race discrimination, and other kinds of workplace abuses. 

 This is about access to justice, not allowing employers to circumvent the law, and making sure people can go to court. Legislation like that should really be a bipartisan issue. But, as with so many other important pieces of legislation, there’s the issue of the filibuster. 

  But, it's challenging because the Federal Arbitration Act has strong preemption of state laws, which limits what states can do. But there are actions states can take to make sure corporations aren’t let off the hook for violating people’s rights. States can increase funding for their own government enforcement of laws. One important proposal that’s been introduced in several states is to create whistleblower laws that would allow workers to bring a case on behalf of the state. In New York State the proposal is called the Empowering People in Rights Enforcement (EMPIRE) Worker Protection Act, which would enable workers or an organization representing workers to file claims on behalf of the State to recover penalties for certain violations of State labor law. This would be similar to False Claims Act laws, which have existed for a very long time.

CNYCA: In June, the Center for New York City Affairs published a report finding that nearly 875,000 workers in many of New York State’s major low-paying industries may be misclassified as “independent contractors.” In what way do forced arbitration clauses perpetuate worker misclassification?

TG: Forced arbitration and class action waivers prevent people from being able to bring their cases in court. When people go before a judge, ultimately, they get an order. The judge, for example, can order an injunction that would require a company to change their practices going forward. But that doesn’t happen in arbitration. Keeping cases out of court facilitates misclassification of workers by employers because it prevents people from being able to go get a decision on the merits of what the law is that could be broadly applicable to a company as a whole.

In relation to gig workers, companies claim that they’re independent contractors. But that’s supposed to mean that the workers are running their own independent businesses. If you’re driving for Uber or delivering groceries for an app, you aren’t running your own business. But misclassification is not just about gig companies; there are cases involving tutors, interpreters, delivery drivers for bakeries, newspaper deliverers, janitors, and all kinds of different jobs. 

One point that often gets lost is that there are already existing laws that set pretty clear boundaries on worker classification. In New York State, there was a case in 2020 about whether a PostMates worker was an employee for purposes of getting unemployment insurance. The Department of Labor determined the worker was entitled to unemployment insurance, and the State’s highest court, the Court of Appeals, upheld that determination, for that worker and for others similarly situated. So, we do need legal clarity, but we also need enforcement of existing laws. 

There’s a huge impact on workers of not getting paid overtime or struggling to get unemployment insurance or other benefits. There's also a serious cost to the general public and other businesses. During Covid, especially in the first year or so when people were really struggling economically, a lot of gig workers got pandemic unemployment assistance funded by the Federal government, which was critical for them. But unemployment benefits are paid out of State trust funds exclusively funded by employer payroll taxes. When gig companies don’t pay, they shift those costs to other employers. So even small businesses are covering what Uber and Lyft did not pay in unemployment taxes in New York State. Covid made the financial downstream repercussions for workers and the public clearer, if workers get injured but their employers have not been paying into workers comp, it ends up putting pressure on the healthcare system and, again, on the public overall. 

Misclassification therefore has a public cost and gives bad actors an unfair economic advantage. This means not only that it should be a top policy priority, but that there are also possibilities for alignment among broad constituencies.  

This interview, which has been edited for length and clarity, was conducted by L.K. Moe and Sally Svenlen of the Center for New York City Affairs.