Kentucky Revised Statute (KRS) 336.700(2), which prohibits employers from conditioning employment on an employee’s agreement to arbitrate any dispute that may arise between them, did not run afoul of the Federal Arbitration Act (FAA), ruled the Kentucky Supreme Court. The state high court first found that, by its express provisions, KRS 336.700(2) prohibited an employer from conditioning employment on an agreement to arbitrate. Because the employer in this instance never had the power to force the employee to arbitrate disputes arising between them as a condition of employment, the resulting arbitration agreement was void. Next, the court determined that because KRS 336.700(2) did not selectively find arbitration contracts invalid, and only invalidated arbitration contracts when the employer evidenced an intent to fire or refuse to hire an employee because of the employee’s unwillingness to sign such a contract, it was not preempted by the FAA (Snyder v. Northern Kentucky Area Development District, September 27, 2018, Minton, J.).
A condition of employment. The employer is a governmental entity that administers social programs in an eight-county area of Northern Kentucky. The employee, who worked as an administrative purchasing agent, signed an agreement mandating arbitration of any dispute she had with the public employer. The agreement made clear that as a condition of employment, she was required to sign it.
Motion to compel arbitration denied. After she was terminated, the employee brought suit asserting claims under the Kentucky Whistleblower Act (KWA) and Kentucky Wages and Hours Act (KWHA). The employer filed a motion to stay the proceedings and compel arbitration based on the arbitration agreement. The trial court denied the motion.
Review. A state court of appeals affirmed, explaining that the employer was a creature of statute, and the wording of two Kentucky statutes, which purportedly prohibit an employer’s conditioning of employment on the employee’s agreement to arbitrate disputes, makes ultra vires any arbitration contract by the employer forcing arbitration in this way. The FAA cannot compel arbitration between the parties because the employer never had authority to enter into an arbitration agreement in the first place, the state appeals court reasoned, and “federal law does not preempt the authority of the Commonwealth to deny the authority of its [agencies] to enter into arbitration agreements.”
The Kentucky Supreme Court granted the employer’s motion for discretionary review to consider whether the FAA preempts Kentucky’s legislative enactment to preserve employee rights because it seeks to prohibit employers from conditioning employment on the employee’s agreement to a contract provision mandating arbitration in the event of a dispute between them.
State-created entities. As an initial matter, the state high court concluded that as a Kentucky created entity, the employer did not have the power to compel, as a condition of employment, any employee to agree to arbitrate any claim, right, or benefit he or she may have against it. In this instance, neither party challenged the applicability of KRS 336.700(2). Like all area development districts, the employer was operated by state employees under KRS 147A.060 and 147A.070 and received taxpayer funding. The entity’s board of directors derived its power from 147A.080 and 147A.090, statutes that detail all of the power that the legislature has granted to the agency. Although the agency appeared to have broad power to enter into agreements and define the terms of those agreements, the high court found that KRS 336.700(2) expressly prohibited it from conditioning employment on an agreement to arbitrate. Because the agency never had the power to force the employee to arbitrate disputes arising between them as a condition of employment, the resulting arbitration agreement was void.
FAA did not preempt statute. The high court next had to determine if the FAA nullified its conclusion that the arbitration agreement in this instance was void. The FAA makes arbitration agreements “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” Under 9 U.S.C. § 2, a court may invalidate an arbitration agreement based on “generally applicable contract defenses” like fraud or unconscionability, but not on legal rules that “apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.” Thus, the FAA preempts any state rule discriminating on its face against arbitration.
Because KRS 336.700(2) did not actually attack, single out, or specifically discriminate against arbitration agreements, the Kentucky court failed to see how it must yield to the FAA. KRS 336.700(2) did not prevent the employer from agreeing to arbitration. Rather, it simply prevented the agency from conditioning employment on the employee’s agreement to arbitration. This was a key distinction supporting the reason that the FAA does not apply to preempt KRS 336.700(2).
Moreover, KRS 336.700(2) does not single out arbitration clauses. KRS 336.700(2) prohibits employers from conditioning employment on an existing employee’s or prospective employee’s agreement to “waive, arbitrate, or otherwise diminish any existing or future claim, right, or benefit to which the employee or person seeking employment would otherwise be entitled.”
That language not only means that an employer cannot force the employee to agree to arbitration on penalty of termination, but it also means that an employer cannot force an employee to, for example, waive all rights to file KWA claims against the employer. In this way, KRS 336.700(2) is a law of general applicability that prevents employers from conditioning employment on the employee’s agreement to forego the exercise of all rights against the employer.
Finding that the FAA did not preempt KRS 336.700(2), the state high court concluded that it did not mandate a different result. Accordingly, it affirmed the result reached by the court of appeals, and remanded the case to the trial court.
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