Chipotle's Mandatory Arbitration Agreements Are Backfiring Spectacularly

The company is facing a flood of arbitration cases over alleged wage theft. A judge called the company's efforts to block them "unseemly."
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A few years ago, the burrito chain Chipotle began requiring employees to sign mandatory arbitration agreements. The idea was to force the workers to give up their right to sue collectively over wage theft or workplace discrimination.

Chipotle’s plan seems to have worked out a little too well: The company is now facing a flood of arbitration cases from former employees determined to win the backpay they claim they are owed.

Facing potentially huge liabilities, Chipotle recently asked a federal judge to block the workers from seeking arbitration with lawyers who’d represented them in court ― despite the fact Chipotle had forced arbitration upon its workers via agreements they had to sign when they were hired.

The judge denied that request, calling Chipotle’s actions “unseemly.”

“This is their worst-case scenario, apparently ― and the scenario they asked for,” said Kent Williams, one of the attorneys representing the former Chipotle employees.

The mess all goes back to a Supreme Court ruling that was supposed to be a gift to powerful employers like Chipotle.

In May, the court ruled 5-4 in Epic Systems v. Lewis that it is legal for employers to require workers to sign arbitration agreements as a condition of employment. By signing them, workers agree they won’t sue the employer in class- or collective-action lawsuits. Instead, the workers will have to take any claims individually to arbitration, where they have no collective power.

The ruling was one of the most contentious of the court’s term, with all four liberal justices dissenting, including Justice Ruth Bader Ginsburg, who called the decision “egregiously wrong.” Employer lobbies cheered the ruling, while employee advocates said it would strip legal recourse from some of the most vulnerable workers.

One reason employers prefer arbitration over court is that workers are less likely to bring a claim at all. A single person trying to recoup back wages worth a few hundred dollars is going to have a hard time finding an attorney willing to take an arbitration case with so little at stake. Big lawsuits, by contrast, allow hundreds or even thousands of workers to band together against the company in pursuit of large claims.

“This is their worst-case scenario, apparently ― and the scenario they asked for.”

- Kent Williams, attorney

With the Epic Systems v. Lewis ruling, the Supreme Court immediately legitimized the arbitration clause Chipotle had started slipping into its employee welcome packet in 2014. The company’s chief compliance officer, David Gottlieb, explained in court how these supposedly voluntary agreements work:

“[I]f you choose not to agree to the arbitration agreement, for example, once you have been given notice and an opportunity to look at it, read it, ask any questions, download it, save it, whatever you want to do ― if you don’t, then you don’t have to be an employee,” Gottlieb said.

When the Epic ruling came down, Chipotle was dealing with a collective action lawsuit involving roughly 10,000 current and former workers who said Chipotle systematically stiffed them on pay, violating minimum wage and overtime regulations. But nearly 3,000 of those workers had signed arbitration agreements.

As HuffPost reported in August, the judge in the case, John Kane, ruled that the Epic decision compelled him to expel those plaintiffs from the suit. That was precisely the outcome Chipotle had been hoping for.

But instead of taking their claims and going home, more than 150 of those workers filed requests for arbitration.

Unlike a collective- or class-action lawsuit, all of those claims would be administered separately, and they could get very expensive for Chipotle. A single case can run tens of thousands of dollars in lawyers fees and payments to the arbitrator service ― in this case, JAMS. The cost of litigating can dwarf the actual damages.

“If you start running the numbers on this thing, arbitration costs could top $30,000 or $50,000 [each],” said Williams. If hundreds or thousands of workers pursue cases, “You get up to, like, tens if not hundreds of millions of dollars very quickly, just in arbitration expenses.”

Under the arbitration rules, Williams said, the cases would be heard in the county where Chipotle last employed the worker in question, meaning the claims would be spread out all over the country. Chipotle has roughly 2,400 locations, according to its latest SEC filings. If so many cases were to move forward, they would present a logistical nightmare for the company.

Williams said Chipotle has so far refused to pay its share of the arbitration filing fee, which amounts to $1,100 per case, preventing those cases from proceeding. A similar situation has been unfolding for Uber drivers who also signed arbitration agreements. As Gizmodo reported earlier this month, some 12,000 drivers are pursuing arbitration with the ride-sharing giant. Like Chipotle, Uber has not paid the filing fees required in those cases.

A JAMS spokesperson declined to comment. Chipotle, which has said in the past that it does not comment on litigation, didn’t respond to emails about the matter.

But Chipotle’s court filings say plenty. The company wasn’t satisfied with getting nearly 3,000 mostly low-wage workers booted from a large lawsuit. It asked Kane, the judge, to forbid those workers from pursuing arbitration with Williams and his team as their attorneys. Their rationale: Because the workers had signed arbitration agreements, they never should have received notice about the collective-action lawsuit and become clients of Williams and his colleagues.

Kane rejected that argument, essentially saying that whatever happens in arbitration isn’t his court’s business. But once the arbitration filings started coming in, Chipotle appealed. “The arbitrations are going forward,” the company bemoaned in its filing, “causing immediate harm to Chipotle.”

The judge ruled against Chipotle yet again, and leveled a withering critique of the company’s legal strategy: “Chipotle’s attempts to delay and obfuscate the claims of the Arbitration Plaintiffs in both the courts and in arbitration (the forum to which it required these employees to submit) are unseemly.”

“If so many arbitration cases were to move forward, they would present a logistical nightmare for Chipotle.”

The pile of arbitration claims coming at Chipotle is pretty unique. It normally wouldn’t be worthwhile for a lawyer to pursue so many individual cases with modest claims, but Williams’ team and the workers had already built their case through the collective-action lawsuit. Ordinarily, Williams acknowledges, these workers probably wouldn’t have found lawyers to pursue arbitration for the $1,000 they believe they are owed.

In other words, mandatory arbitration will probably work out well for Chipotle in the long run, even if the company faces a potential legal debacle right now.

Companies like Chipotle like to say they prefer arbitration to the courts because it’s more efficient and better for both parties. But Chipotle’s resistance to arbitrating these claims ― after steering workers into arbitration ― suggests its policy was never really about fairness and efficiency, as Kane noted in a recent order.

“Congesting the federal courts with countless appeals to prolong arbitration proceedings for numerous employees provides no benefit to the public and flouts the efficient resolution Chipotle professes to seek,” the judge scolded.

Although Chipotle hasn’t paid filing fees yet, Williams said he plans to continue bringing more arbitration cases for any worker who wants to pursue arbitration after being kicked out of the lawsuit. After the new year, he hopes to file them in batches of 100 every couple of weeks, for as long as they come in.

“Everybody that we file for has individually retained us. We’ve talked to them and interviewed them,” Williams said. “These are all solid claims, and they’re not going away.”

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Clarification: Language in this story has been amended to clarify that JAMS is an arbitrator service and not an arbitrator.

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