On September 27, 2018, the Kentucky Supreme Court in Northern Kentucky Area Development District v. Snyder¹ held that the Federal Arbitration Act (FAA) does not preempt a Kentucky statute, KRS § 336.070(2), barring employers from requiring employees to waive, arbitrate, or diminish statutory rights as a condition or precondition of employment. Although this is ostensibly the first state-wide judicial prohibition on an employer's mandatory arbitration policy, if appealed, the decision is not expected to withstand U.S. Supreme Court scrutiny.

Background

Danielle Snyder worked for the Development District (NKADD), a government entity providing social programs to eight counties in Northern Kentucky, as an administrative purchasing agent. As a condition of her employment, she signed an agreement requiring arbitration of any employment dispute with NKADD. The agreement specifically stated, in bold type: “By accepting employment with the District, you will have accepted this Agreement under the Federal Arbitration Act, and it will be binding on claims relating to your employment.”

After NKADD terminated Ms. Snyder’s employment, she filed a whistleblower and wage and hour lawsuit in Boone Circuit Court. The Development District moved to stay the proceedings and compel arbitration, which the court denied. On appeal, the Kentucky Court of Appeals affirmed denial of the motion, concluding that NKADD never had authority to enter into the arbitration agreement. As to the FAA, the court of determined: “federal law does not preempt the authority of the Commonwealth to deny the authority of its [agencies] to enter into arbitration agreements.”

Kentucky Supreme Court Weighs In

The Kentucky Supreme Court granted discretionary review to consider whether the FAA preempts KRS § 336.700(2), which reads:

Notwithstanding any provision of the Kentucky Revised Statutes to the contrary, no employer shall require as a condition or precondition of employment that any employee or person seeking employment 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 under any provision of the Kentucky Revised Statutes or any federal law.

The court first determined that the NKADD, as a state-created entity, acted beyond its authority in requiring an employee to arbitrate employment disputes as a condition of employment. Following that conclusion, the court considered “if the FAA nullifies this conclusion because of its preemptive effect on laws discriminating against arbitration.” 

As to FAA preemption, the Kentucky Supreme Court turned to the United States Supreme Court’s decision in Kindred Nursing Centers Ltd. Partnership v. Clark and quoted the preemptive scope as follows: “The FAA thus preempts any state rule discriminating on its face against arbitration . . . And not only that: The Act also displaces any rule that covertly accomplishes the same objective by disfavoring contracts that (oh so coincidentally) have the defining features of arbitration agreements.”

The court determined that, under this standard, FAA preemption would not apply because KRS § 336.070(2) “does not actually attack, single out, or specifically discriminate against arbitration agreements.” That is, according to the court, because the statute applies more generally to bar conditioning employment on waiving, arbitrating, or diminishing any employment rights, FAA preemption is not implicated. 

In reaching this decision, the Kentucky Supreme Court noted that employees and employers may continue voluntarily to enter into arbitration agreements that do not constitute conditions of employment.

What's Next?

We will keep a close eye on this decision, both as NKADD determines whether to petition for certiorari before the United States Supreme Court and as Kentucky courts apply the decision. While the Kentucky Supreme Court utilized broad language in holding that the FAA does not preempt KRS 336.070(2), the court also put the analysis in the context that the FAA “does not mandate a contrary holding” than that Kentucky state agencies cannot condition employment on waiving, arbitrating, or diminishing employment rights. Arguably, the Kentucky Supreme Court’s ruling could be construed narrowly to apply only to state administrative agencies, but it is not clear whether it will be extended to apply to private employers as well. Nor is it clear whether the decision would apply to employers providing employees with a choice whether to arbitrate or instead to opt out of arbitration at their own election.