Arbitration Agreement Does Not Bar New York State Division of Human Rights Proceeding

January 28, 2021

By: Nicholas P. Jacobson and Thomas G. Eron

Earlier this month, the federal court for the Western District of New York issued a decision in Charter Communications, Inc. v. Derfert, No. 20-cv-915, 2021 WL 37726 (W.D.N.Y. Jan. 4, 2021) holding that an employment arbitration agreement did not preclude a hearing before the New York State Division of Human Rights (the Division) on an employee’s discrimination claim.

Lynda Derfert had applied for employment with Charter Communications, Inc. As part of the hiring process, she signed Charter’s Mutual Arbitration Agreement, which provided for arbitration as the exclusive forum to resolve all claims related to “pre-employment, employment, employment termination, or post-employment” including discrimination and failure to hire claims, as well as claims related to pre-employment background checks. The arbitration agreement further provided that if Ms. Derfert pursued any administrative claims, any proceeding on the merits or for damages would also be exclusively subject to arbitration.

While Charter initially made a conditional offer of employment, after receiving the results of a third-party background check, Charter revoked the offer. Thereafter, Ms. Derfert filed a complaint with the Division alleging that she was discriminated against on the basis of her arrest and conviction records. Charter participated in the Division’s investigation, but, after the Division found probable cause and issued a notice of hearing on Ms. Derfert’s complaint, Charter sued Ms. Derfert in federal court to enforce the arbitration agreement, seeking to enjoin the Division hearing and compel arbitration. The Division intervened and moved to dismiss the federal court action to allow its hearing to proceed.

The Charter Communications court reasoned that there were two competing U.S. Supreme Court decisions that arguably controlled the outcome: EEOC v. Waffle House, Inc., 534 U.S. 279 (2002) and Preston v. Ferrer, 552 U.S. 346 (2008). In Waffle House, the Supreme Court held that an arbitration agreement between an employer and an employee could not prohibit the EEOC from pursuing an action in federal court to enforce the law and vindicate the public interest even though the EEOC sought relief solely on behalf of the alleged victim. Conversely, in its subsequent decision in Preston, the Supreme Court held that, pursuant to the Federal Arbitration Act (FAA), an arbitration agreement barred an action brought by an employee before the California Labor Commissioner for violation of the state labor law. In the Charter decision, the court explained that the difference in the Supreme Court’s decisions was that in Waffle House, the EEOC was acting in a prosecutorial capacity to bring an action vindicating the public interest. As such, an arbitration agreement to which the EEOC was not a party could not prohibit it from carrying out its prosecutorial function. By contrast, in Preston, an individual was pursuing an administrative claim on his own behalf; the California Labor Commissioner was acting in an adjudicatory role, which did not preclude enforcement of the arbitration agreement, and the FAA preempted the use of the state forum.

Under the NY Human Rights Law, once the Division has issued a probable cause determination and the matter proceeds to public hearing, the Division can act as both prosecutor and judge: the Division will assign one of its attorneys to present the employee’s claim, while the administrative law judge who presides over the hearing is a Division employee and the Division’s Commissioner issues the final administrative decision. Significantly, the Division’s rules allow an employee to be represented by a private attorney instead of a Division attorney. Further, the Division does not typically issue its own complaint but rather proceeds based on the employee’s complaint, which is in contrast to some administrative schemes, such as under the National Labor Relations Act. 

Nonetheless, the Charter court denied the motion to enjoin the Division hearing. The court found that Waffle House was controlling, and that the arbitration agreement between Ms. Derfert and Charter did not preclude a hearing before the Division on her claims. The court reasoned that, in all cases, the Division has a prosecutorial role to enforce the Human Rights Law and vindicate the public interest in preventing discrimination. Even in a case in which the employee has private counsel, the Division retains an interest and must consent to that alternative prosecution of the case. Through a separate arbitration agreement, an employer and an employee could not prevent the Division from exercising this enforcement function in the public interest. 

The court also denied Charter’s petition to compel Ms. Derfert to arbitrate the pending claim, because doing so would either compel Ms. Derfert to initiate an arbitration proceeding, which she had not elected to do, or to remove the Division proceeding into arbitration, which the court found to be inappropriate, as discussed above.

If you have questions regarding the effectiveness of your organization’s employment arbitration agreements or would like to consider preparing or modifying an arbitration agreement, please reach out to your Bond attorney or any attorney in Bond’s Labor and Employment practice.