Kentucky Bans Mandatory Employee Arbitration Agreements

Labor & Employment @lert

Date: December 12, 2018

Key Notes:

  • Kentucky Supreme Court holds that mandatory employment arbitration agreements are unenforceable in the Commonwealth.
  • Kentucky’s position seems at odds with the Supreme Court of the United States.

A recent Kentucky Supreme Court decision sets the stage for another confrontation between the Commonwealth and the U.S. Supreme Court. In Northern Kentucky Area Development District v. Danielle Snyder, the Kentucky Supreme Court nullified the employment agreement that Ms. Snyder signed when she began working at the Development District. The District, a public entity, uses federal funds to provide health care services to the elderly and disabled as well as job training and economic development services to the region. When Ms. Snyder started her employment with the District, as a condition of employment, she was required to enter into an employment agreement that obligated her to submit all claims related to her employment to binding arbitration, as part of the Development District’s employee dispute resolution program. Ruling in Ms. Snyder’s favor, the Kentucky Supreme Court was the first state in the country to hold that all mandatory pre‑employment arbitration agreements in the state are unenforceable.

Kentucky’s tangle with the U.S. Supreme Court over arbitrations begins with the 2017 SCOTUS ruling in Kindred Nursing Center v. Clark. In Kindred, SCOTUS reversed a decision of the Kentucky Supreme Court regarding a nursing home arbitration agreement. The Kentucky Supreme Court had refused to enforce an agreement to arbitrate between Janis Clark, the representative of Olive Clark, Janis’ deceased mother, and the nursing home where Olive had resided. Janis, acting under a durable power of attorney that she was granted by her mother, signed a contract with Kindred when her mother was admitted to the nursing home. That contract provided that any disputes arising from Olive’s stay at Kindred would be resolved by binding arbitration. The Kentucky Supreme Court found that Janis could not have compromised Olive’s right to bring litigation against Kindred, because Janis’ power of attorney did not specifically spell out the power to sign away her mother’s right to take legal action in the courts in favor of arbitration.

SCOTUS used the Kindred case to reinforce its strong support of arbitration under the Federal Arbitration Act. The Court held that the FAA required courts to place arbitration agreements on an equal footing with other contracts. The Court reasoned that because the Kentucky ruling singled out arbitration agreements for disfavored treatment it violated the FAA. SCOTUS held that the Kentucky Supreme Court specifically impeded the ability of attorneys-in-fact to enter into arbitration agreements and thus flouted the FAA’s command to place arbitration agreements on an equal footing with all other contracts. SCOTUS stated that “The Act cares not only about the ‘enforce[ment]’ of arbitration agreements, but also about their initial ‘valid[ity],’ that is, about what it takes to enter into them … A rule selectively finding arbitration contracts invalid because improperly formed fares no better under the Act than a rule selectively refusing to enforce those agreements once properly made.”

As opposed to the relatively limited effect of Kindred, the Snyder case’s reach is extremely broad. Although the ruling pertained to a government entity, it applies equally to all private sector employers and workers in the Commonwealth. While the decision does not forbid employees and employers from entering into agreements to arbitrate, it forbids employers from requiring employees to enter into such agreements as a condition of employment.

Ms. Snyder initially filed a complaint in Boone Circuit Court, stating that she was fired after she brought forward evidence of fraud and mismanagement by the Development District under the Kentucky Whistleblower Act. The Development District moved to stay the proceedings and to compel arbitration based on its arbitration agreement. The Boone Circuit Court held that the Development District’s mandatory arbitration agreement was unenforceable and denied the motion. The District lost again in the Kentucky Court of Appeals. The Kentucky Supreme Court based its decision on KRS 336.700(2), which provides that “no employer shall require as a condition or precondition of employment that any employee or person seeking employment waive, arbitrate, or otherwise diminish an existing or future claim, right, or benefit to which the employee … would otherwise be entitled.” Therefore, the Development District’s arbitration agreement facially violated the statute.

As you would imagine, the Kentucky Supreme Court took pains in its Snyder decision to distinguish SCOTUS’s Kindred decision. The Kentucky Court held that the FAA does not preempt KRS 336.700(2) because the statute does not actually attack, single out or specifically discriminate against arbitration agreements. The court stated that “This is not an attack on the arbitration agreement – it is an attack on the employer for basing employment decisions on whether the employee is willing to sign an arbitration agreement.” Nonetheless, it remains to be seen how this holding squares with SCOTUS’s instruction in Kindred that “A rule selectively finding arbitration contracts invalid because improperly formed fares no better under the Act than a rule selectively refusing to enforce those agreements once properly made.”

The likelihood that SCOTUS will choose to review any case is remote. However, the fact that the Snyder decision has such broad consequences and addresses an issue that has repeatedly captured the Court’s attention in recent years makes certiorari less remote than most.

FOR MORE INFORMATION

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Stephen Richey
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Stephen.Richey@ThompsonHine.com

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