With the legalization of recreational marijuana in eight states, plus Washington, D.C., and varying forms of cannabis legal in 45 states, cannabis businesses are struggling to ensure their growing workforce has appropriate working conditions while balancing the costly threats of employment-related lawsuits.
Although they’re not a solution for everybody, arbitration agreements and more specifically, arbitration agreements with class action waivers, are a viable option to reduce unnecessary litigation costs while maintaining a level playing field for businesses.
Pros and Cons
Arbitration agreements have become increasingly popular for employers as they can increase the company’s chance for success and often reduce the costs of defending against lawsuits filed by employees. Arbitration, like traditional courtroom litigation, is a process for resolving legal disputes, yet it has significant differences from litigation. Arbitration is akin to a private court system, with the “trial” taking place in a conference room, rather than a courtroom, and an arbitrator serving the role as a private judge, who is often a retired judge or experienced arbitrator. In arbitration, there is no jury, and the arbitrator’s decision is binding.
Arbitration has both pros and cons, but increasingly it appears that the benefits often outweigh the cons. In many states, such as California, employers must agree to cover the entire cost of the arbitration, which can be costly as the arbitrator is paid on an hourly or daily basis at rates typically higher than that of the employer’s attorneys. Many employers find that because arbitration is a streamlined process with cases typically resolved within months instead of years, the cost of the arbitrator is worth the additional upfront costs of arbitration. However, smaller employers may feel differently and may prefer litigating in court.
Some employers are concerned that arbitrators will try to appease both parties by awarding an employee some amount, even when not warranted, instead of thoroughly analyzing the case and finding in favor of the employer. However, to the contrary, other employers feel they get more of a “fair shake” when an arbitrator decides the case based on the law, instead of a jury packed full of individuals who can sympathize with employees and may decide the case based on emotion.
Additionally, because arbitration proceedings are private and not on any public court’s docket, the entire process is often confidential, including the arbitrator’s final award. Confidentiality is a key benefit to many employers, as it protects the company’s reputation and minimizes the chance of other copycat claims.
Finally, employers can obtain class action waivers by using arbitration agreements, which can be very powerful in preventing class actions against the company.
Cannabis Employers and Federal Law
Arbitration agreements are supported by the Federal Arbitration Act, which is a set of federal laws strongly favoring arbitration and consistently supported by the U.S. Supreme Court.
Because marijuana is still a federally illegal drug, cannabis entrepreneurs may wonder whether the Federal Arbitration Act applies to their business or whether an employee can avoid arbitration.
Employees may claim that the contract is void under federal law regarding cannabis employers; however, the Federal Arbitration Act and U.S. Supreme Court decisions, such as the decision in Buckeye Check Cashing, Inc. v. Cardegna, make it clear that the parties cannot avoid arbitration simply because the underlying contract is related to something illegal under federal law.
While there has yet to be a case specifically addressing a cannabis industry employer, it is likely that the Federal Arbitration Act will not keep cannabis employers out of arbitration simply because they are involved with a product that is currently illegal under federal law.
Class Actions
In addition to employees waiving their right to a jury trial, a more controversial element of the agreement — the class action waiver — waives the right of employees to bring a class action against the employer on behalf of several other employees wronged by the same conduct. Within the arbitration agreement, employees acknowledge that they will bring all claims relating to their employment relationship with the business to arbitration, and agree to not bring a lawsuit on behalf of any other workers. This keeps disputes limited to one plaintiff in one arbitration, where damages will be limited to the one employee. Most class actions result in multi-million dollar awards due to their size.
While class action waivers help some businesses keep litigation costs low, they are often criticized as taking away employees’ right to join together to obtain better working conditions. This argument is frequently cited by the National Labor Relations Board in challenging class action waivers, even when the business is not unionized. Over the last year, a few federal courts have started to agree with the National Labor Relations Board, striking down the class action waiver in employers’ arbitration agreements. Specifically, courts in the 7th and 9th circuits, have found that under a specific set of circumstances, class action waivers violate employees’ rights under the National Labor Relations Act, and are therefore unenforceable. This is important to cannabis businesses because the 9th Circuit covers several states where recreational marijuana has been legalized, including Alaska, California, Oregon, Washington and Nevada. However, class action waivers are continuously upheld in state courts, including California, which typically opposes arbitration agreements.
Ultimately, the law is in a state of flux 
regarding whether class actions are enforceable and under what circumstances. The U.S. Supreme Court has agreed to hear the matter this term to hopefully put the issue to rest in the year to come. Additionally, President Donald Trump’s Supreme Court appointment to replace Justice Antonin Scalia will likely have a significant impact on how the court will determine the enforceability of class action waivers in employment arbitration agreements. Legal analysts predict that a more conservative appointee will tip the scale in favor of class action waivers.
Regardless, in the meantime, employers may still want to pursue arbitration agreements with class action waivers because of the protection it provides.
Next Steps
For most employers, an arbitration policy can be of great value in helping reduce the costs and risks of employment disputes; however, the pros and cons of implementing such a policy should be analyzed in detail based on each employer’s needs.
Currently, while this issue is pending before the Supreme Court, there are still ways to craft an enforceable arbitration agreement with or without a class action waiver. Cannabis employers should consult an employment attorney experienced in drafting enforceable arbitration agreements with class action waivers if this is something they believe can benefit their business. Arbitration agreements and class action waivers are not for every employer, but at a minimum, they warrant thoughtful consideration of whether they’re right for each business.
Danielle Garcia and Danielle Moore are attorneys at Fisher Phillips (www.fisherphillips.com). Danielle Garcia’s practice focuses on representing clients in all aspects of labor and employment law, including traditional labor relations management, harassment and discrimination.
Danielle Moore represents and counsels employers in the cannabis industry in all aspects of labor and employment law, including discrimination, wrongful termination, harassment, retaliation, wage-hour class action lawsuits, and general preventive advice.