October 18, 2018

Kentucky Employers Can’t Enforce Arbitration Agreements Required for Employment

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Kentucky employers may need to reconsider how they implement employee arbitration agreements after a Supreme Court of Kentucky decision issued late last month.

In a unanimous opinion rendered September 27, 2018, the Court held in Northern Kentucky Area Development District v. Danielle Snyder, No. 2017-SC-000277-DG, that Kentucky employers may not require employees to sign arbitration agreements as a condition of their new or continued employment. The decision makes Kentucky the first state in the nation to prohibit employers’ use of mandatory arbitration agreements as a condition of employment.

The Case

The decision arose from a lawsuit brought against the Northern Kentucky Area Development District (the “District”), a state agency, by one of its former employees. As a condition of her employment, the employee had been required to a sign a binding arbitration agreement in which she agreed to submit any employment-related disputes with the District to binding arbitration.

When the employee later sued the District in state court asserting various employment-related claims, the District moved to enforce the arbitration agreement. Both the trial court and the Court of Appeals held that the arbitration agreement was unenforceable. The Supreme Court of Kentucky then granted discretionary review to consider the principal legal issue: whether the Federal Arbitration Act (“FAA”) preempts (and effectively nullifies) Kentucky Revised Statute 336.700, which prohibits employers from requiring employees to sign arbitration agreements as a condition of employment.

The Court held that the FAA does not preempt KRS 336.700, and observed that the FAA “preempts any state rule discriminating on its face against arbitration—for example, a ‘law prohibit[ing] outright the arbitration of a particular type of claim.’” However, the Court reasoned that KRS 336.700 does not “actually attack, single out, or specifically discriminate against arbitration agreements.” Instead, the statute “simply prevents [employers] from conditioning employment on the employee’s agreement to arbitration.”

Thus, because the “statute only proscribes conditioning employment on agreement to arbitration, not the act of agreeing to arbitration,” the Court concluded that the statute was not preempted by the FAA. In so holding, the Court did not limit its decision to only public sector agreements, but instead extended the ruling to all such arbitration agreements in the state.

What This Means for Employers

The District has filed a petition asking the Supreme Court of Kentuckyto reconsider its decision, so the ruling is not operative until that petition is ruled upon. If that petition is unsuccessful, the District may appeal the decision to the U.S. Supreme Court. Importantly, the Supreme Court of Kentucky’s decision appears to conflict with recent U.S. Supreme Court precedent upholding the FAA’s broad preemptive effect. See, e.g., Kindred Nursing Centers Ltd. Partnership v. Clark, 137 S.Ct. 1421 (2017). Previous decisions from federal courts in Kentucky similarly suggest that the U.S. Supreme Court would likely resolve the question in favor of arbitration. See Johnson v. Career Sys. Developments, 2010 U.S. Dist. LEXIS 4052, **3-4 (W.D. Ky. Jan. 19, 2010). The District may also ask the Kentucky General Assembly to craft new legislation to avoid conflicts.

Assuming the Snyder decision becomes and remains good law, Kentucky employers should review their hiring practices if arbitration agreements are a standard condition of initial or continued employment. In light of Snyder, employers with arbitration agreements should be more proactive about enforcement strategies.  Every opportunity should be taken to initiate litigation in federal court, or to remove litigation from state to federal court, to ensure that there is a favorable forum for arbitration agreements to be enforced.  Federal courts are not bound by the Supreme Court of Kentucky’s interpretation of federal preemption principles, and are more likely to apply the Federal Arbitration Act broadly in favor of compelling arbitration – notwithstanding KRS 336.700 and Snyder.