Kentucky Enacts New Arbitration Law for Employers

On March 25, 2019, Kentucky Governor Matt Bevin signed into law a bill that allows Kentucky employers to require arbitration as a condition of employment and continued employment. The law substantively amends the language of two state statutes: KRS § 336.700 and KRS § 417.050.

Senate Bill 7 will become effective June 27, 2019 and will apply prospectively and retroactively.

Senate Bill 7, allows Kentucky employers to require employees to arbitrate claims as a condition of employment. The new law also allows employers and employees to contractually limit the time period in which employees must file employment-related claims. The new law also allows an employer to require, as a condition of employment, a background check. This is all good news for Kentucky employers.

New Law Reverses Recent Supreme Court Decision While Protecting Employee Rights.

Senate Bill 7 nullifies the Kentucky Supreme Court’s 2018 decision in Northern Kentucky Area Dev. Dist. v. Snyder, No. 2017-SC-000277-DG, which only allowed for voluntary arbitration agreements. Since the Kentucky Supreme Court’s decision in 2018, Kentucky has been the only state that prohibits the use of mandatory arbitration agreements as a condition of employment or continued employment.

Specifically, Senate Bill 7 amends the Kentucky Revised Statute 336.700 which states that no employer shall require as a condition or precondition of employment that any person or person seeking employment waive, arbitrate, or diminish any existing future claim, right, or benefit. However, Senate Bill 7 amends the Kentucky Arbitration Law statute to allow employers to require arbitration agreements to be a condition of employment.

The Key Points of the New Kentucky Arbitration Law are outlined below:

Employers may now require:

An employee or person seeking employment to execute an agreement for arbitration, mediation, or other form of alternative dispute resolution as a condition or precondition of employment;
A former employee to waive an existing claim as a condition or precondition of rehire as part of a settlement of pending litigation or other legal or administrative proceeding;
An employee or person seeking employment to execute an agreement to “reasonably reduce” the statute of limitations for filing a claim against the employer, provided that the applicable federal or state law does not preempt and prohibit such a shortening of the statute of limitations, and provided that the agreement does not reduce the statute of limitations by more than 50 percent;
An employee or person seeking employment to consent to a background check or similar type of personal report in conformance with state and/or federal law that requires consent of the individual prior to an employer’s receipt or use of the report.

Agreements must account for:

A reasonable location for the arbitration;
Mutuality of obligation sufficient to support the agreement;
Fairness to the parties to the agreement, which includes providing a fair process to select an impartial arbitrator, and equitably and lawfully allocate arbitration costs between the parties;
That the parties have at least one channel for pursuit of a legal claim, either by requiring the claim be arbitrated individually or otherwise; and
Empowering the arbitrator to award all types of relief for the particular type of claim that would be available in a court, including punitive damages as provided by law.
Arbitrators must disqualify themselves if they have a conflict of interest (as defined by the statute on judicial disqualification, KRS 26A.015).
If the mandatory arbitration agreement fails to specify the rules and protocols that will govern the arbitration process, then the arbitrator will use Kentucky Rules of Civil Procedure.
Any shortened statute of limitations provided in a previously signed arbitration agreement that reduces the statute of limitations beyond that permitted under Senate Bill 7 “shall be stricken” and will not operate to invalidate the entire agreement.

New Law Allows Agreements to Limit the Statute of Limitations

The law also provides Kentucky employers with several additional rights, including confirming that employers may require:

a former employee to waive existing claims as a condition for rehiring as part of a settlement of pending litigation;
as a condition of employment, that an employee or applicant agree to a reduced limitations period for filing claims against the employer, provided that such an agreement does not reduce the period of limitations by more than 50 percent of the time that is provided under the law applicable to the claim. This is significant given the default five-year statute of limitations for many employment related causes of action in Kentucky may now be reduced by half; and
an employee or applicant to agree to allow the employer to conduct a background check.

These additional rights are a welcome change for many Kentucky employers.

Additional Safeguards:

Senate Bill 7 also provides a several other important features. For instance, arbitrators must disqualify themselves if they have a conflict of interest (as defined by the statute on judicial disqualification, KRS 26A.015).

Two other provisions in Senate Bill 7 are significant for Kentucky employers. The first provides that if the mandatory arbitration agreement fails to specify the rules and protocols that will govern the arbitration process, then the arbitrator will use Kentucky Rules of Civil Procedure. This is important because if an employer wants to retain the opportunity to file a dispositive motion in the arbitration proceeding, Kentucky’s standard for granting summary judgment under the Kentucky Rules of Civil Procedure can be particularly challenging.

The second feature states that any shortened statute of limitations provided in a previously-signed arbitration agreement that reduces the statute of limitations beyond that permitted under Senate Bill 7 “shall be stricken” and will not operate to invalidate the entire agreement. This, too, is important since most arbitration agreements provide that if any portion of the arbitration agreement is invalidated, the court will modify that portion to conform with the law.

New Guidelines for Submission of Arbitration Agreements

The new Kentucky Arbitration Law also amends the Kentucky Revised Statute 417.050(1) which presents guidelines for validation and submission of arbitration agreements. KRS 417.050(1) now states:

“A written agreement to submit any existing controversy to arbitration or a provision in written contract to submit to arbitration any controversy thereafter arising between the parties is valid, enforceable and irrevocable, save upon such grounds as exist at law for the revocation of any contract. This chapter does not apply to: Arbitration agreements contained within the collective bargaining agreements entered into by employers and the respective representatives of member employees; and Insurance contracts. Nothing in this subsection shall be deemed to invalidate or render unenforceable contractual arbitration provisions between two (2) or more insurers, including reinsurers.”

How does the New Kentucky Arbitration Law affect my business?

Employers will now be allowed to require arbitration as a condition of employment in Kentucky. Employers would do well to review and update their employment agreements to ensure compliance with Senate Bill 7. These new developments should be reviewed with experienced counsel to determine how the new law will affect your business.