On March 3, the President of the United States signed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act which passed Congress with strong bipartisan support. Employees now have an option to sue their employers in court for claims of sexual harassment and sexual assault even if they signed mandatory arbitration agreements as a condition of employment.
The new law amends the Federal Arbitration Act to prohibit enforcement of contract provisions that mandate arbitration or waive the right to bring a joint, class or collective action in cases involving workplace sexual harassment and sexual assault disputes. These changes invalidate any current pre-dispute agreement forcing an employee to arbitrate a case related to a sexual harassment or sexual assault dispute, except as to disputes that have already arisen or accrued prior to enactment of the new federal law.
What’s wrong with mandatory arbitration?
The trend has been for companies to require that their new hires sign arbitration agreements before they start work. If a worker is then sexually harassed on the job and files a lawsuit in court, the company uses the arbitration agreement to force the lawsuit out of court and into confidential arbitration, keeping the details and bad actors under wraps.
A 2018 study by the Economic Policy Institute indicated that the share of U.S. workers subject to mandatory arbitration more than doubled since the early 2000s to 55 percent when the study was published. According to the White House statement when the bill was signed, over 60 million American workers are currently subject to mandatory arbitration provisions.
Organizations have embraced mandatory arbitration largely because of the confidential protection and cost savings it provides. Lawsuits in courts are open to the public, but arbitration is a secret proceeding that is shrouded in confidentiality, often requiring a sweeping non-disclosure agreement from the complainant as a condition of any compensation. Companies generally win more in arbitration, and when they lose, the damages are often much less than if decided by a jury. Arbitration awards can only be appealed on limited grounds, so the employee has few options if dissatisfied with the result.
How is this relevant to ethical culture?
In practice, mandatory arbitration has meant that serious and destructive misconduct can remain hidden, and the perpetrators remain unsanctioned. When FOX News anchor Gretchen Carlson brought legal proceedings against CEO Roger Ailes in 2016, she was bound by a mandatory arbitration provision that kept her allegations secret. In the end, her lawyers found a way around the clause, and she recovered $20 million in a settlement. Dozens of other women came forward and Ailes was forced to step down.
The new legislation invalidates such restrictions. The epidemic of sexual harassment settlements and legal actions that erupted in the wake of #MeToo suggests that predatory behavior was allowed to flourish without accountability, protected by secret proceedings, and with limited consequences. For organizations invested in ethics and compliance, ensuring one standard of justice for everyone, at every level, is fundamental.
Transparency enhances ethical culture
Moreover, our research—and that of other organizations—shows that transparency, a.k.a. sunshine, is an essential element of an effective ethical culture. As LRN’s Founder and Chairman, Dov Seidman, articulated it, being fully transparent about how you operate and make decisions that affect stakeholders, having the courage to publish explicit standards and expectations of conduct, and fighting to maintain them—however inconvenient—are hallmarks of executives who lead with moral authority, thus strengthening their ethical culture. And LRN’s recently published Benchmark of Ethical Culture demonstrates that companies with the strongest ethical cultures outperform by approximately 40% across key measures of business performance, including customer satisfaction, employee loyalty, innovation, adaptability, and growth.
Our research on how E&C programs fared during the pandemic shows that leaders embraced transparency in meeting the demands of a changed workplace. According to our 2022 E&C Program Effectiveness Report, 96 percent of our 1,200 respondents reported that their leaders and managers communicated candidly about the challenges facing them during the crisis. Significantly, 82 percent reported that their organization’s ethical culture emerged stronger from the pandemic, an encouraging sign of program effectiveness.
Thus, the new act is a welcome step towards transparency and accountability, two essential features of an effective ethics and compliance program.