Diaz v. Tesla: Straight from the Jim Crow Era?

NINA GRISCELLI—In October 2021, a San Francisco federal court ordered Tesla to pay $137 million in damages to Owen Diaz, a Black former worker who accused the company of turning a blind eye to discrimination and racial abuse at the company’s plant in Fremont, California. As a former contract elevator operator at one of Tesla’s staffing agencies, Diaz claimed that fellow workers called him the “N-word,” told him to “go back to Africa,” and that he saw racist and derogatory images in the factory’s bathroom stalls such as swastikas and other racist graffities. Diaz said he complained to Tesla about his treatment, but his supervisors failed to stop the abuse. In October 2017, Diaz, along with his son and another man who worked at the factory, filed a complaint under Section 1981 of the Civil Rights Act, which does not put a cap on damages for large companies. Four years later, the San Francisco federal court jury awarded judgment in Diaz’s favor: $7 million in emotional distress and $130 million in punitive damages—reportedly one of the largest awards in a racial harassment case in the history of the United States.

This ruling seems to be the product of a lucky turn of events for Diaz. In fact, Diaz’s employment at one of Tesla’s staffing agencies enabled him to sue under the joint employment doctrine. Joint employment is the sharing of control and supervision of an employee’s activity among two or more business entities. When firms use staffing agencies to provide workers, as is the case here, this creates scenarios of joint employment. Legally speaking, the joint employment doctrine enables an employee of one entity to hold another entity liable if the latter participates in employment discrimination and/or fails to take appropriate corrective measures. As such, while Diaz was able to sue Tesla through the joint employment doctrine, his employment contract with Tesla’s staffing agency exempted him from signing Tesla’s mandatory arbitration clause. Diaz was thus allowed to pursue his case in federal court and have a jury trial.

As a joint employee able to escape Tesla’s mandatory arbitration net, Diaz’s case only highlights the role of mandatory arbitration in abridging direct employee’s statutory rights. Astonishingly, of almost 90 employment-related arbitration complaints filed against Tesla from 2016 to March of this year, the company only lost one arbitration— a case very similar to Diaz’s that ended in May with a $1 million award to the ex-employee. Most other cases settled or were abandoned, withdrawn, or dismissed without a hearing. The numerous hostile-work-environment-complaints Tesla has received compared to the company’s small losses in arbitration, suggests that mandatory arbitration has had a great effect on fostering discriminatory work environments and has lessened companies’ incentives to implement effective corrective policies against both disparate treatment and impact.

Interestingly, when the Federal Arbitration Act (FAA) was enacted in 1925, the statute only applied to business disputes. It was drafted with an eye toward trade association arbitration, not employment or consumer disputes. But in the 1980s, the Supreme Court massively expanded the scope of the FAA through a series of pro-corporation decisions. Today, an employer can demand that a worker sign away a range of rights as a condition of employment (e.g., rights to minimum wages and overtime pay, rest breaks, protections against discrimination and unjust dismissal, privacy protection, family leave, etc.)

Employment contracts can also require disputes be referred to an arbitrator that is chosen by the company and can prohibit class action lawsuits. This prevents employees from joining together to challenge systemic corporate wrongdoing. Moreover, once a dispute is decided, there is no right to appeal. After an arbitration proceeding is complete, the FAA gives courts extremely limited power to review arbitral awards, no matter how erroneous they might be (an arbitration award can only be set aside on four objectively narrow grounds).

The trend of forced arbitrations, which numerous scholars have called “the arbitration epidemic,” seems to give corporations a “get out of jail free” card for all potential transgressions and undermines decades of achievements in labor rights. Not only are workers stripped of their rights to go to court, but they also have very slim odds of winning at arbitration. On average, employees win less often and receive lower damages in arbitration than they do in court. In truth, employers tend to win cases more often when they appear before the same arbitrator in multiple cases, indicating they have a repeat-player advantage over employees due to their regular involvement in arbitration.

“If this sounds unfair, it’s because it is,” announced Congressman Johnson of Georgia (D-04). In an attempt to fix this “epidemic,” legislators have introduced numerous bills before Congress. The most prominent effort has been the proposed Arbitration Fairness Act of 2009 (AFA), which, if enacted, would prohibit pre-dispute, forced arbitration agreements from being enforceable if they required forced arbitration of an employment, consumer, or civil rights claim against a corporation. The AFA, despite having been repeatedly proposed in 2009, 2011, 2013, and 2015, never received a vote. Under the Trump administration, its passage in Congress was made even less likely.

Nonetheless, mandatory arbitration opponents are not giving up. In 2019, Congressman Johnson resurrected the AFA and sponsored yet another bill: the Forced Arbitration Injustice Repeal (FAIR) Act. Though the new bill has not passed and faces arduous opposition, certain recent events offer a glimmer of hope. For example, various big Silicon Valley companies like Google and Uber decided to take the moral high ground and backed off the use of mandatory arbitration for their full-time employees. Unfortunately, Tesla has not announced whether it would contemplate following these steps. Such is also the case for Amazon, considered to be the biggest abuser of forced arbitration in the United States.

Notwithstanding certain companies’ progress, it has become clear that effective legislation needs to pass in order to combat the pitfalls of mandatory arbitration. If not, companies like Tesla will get away, unchecked by the law, with discrimination that Diaz alleged came “straight from the Jim Crow era.”