Tesla’s Insistence on Arbitration Adds to Reputational Risks

Dana Hull, Bloomberg News

People enter the Tesla Inc. assembly plant in Fremont, California, U.S., on Monday, May 11, 2020. Elon Musk restarted production at Tesla's only U.S. car plant, flouting county officials who ordered the company to stay closed and openly acknowledging he was risking arrest for himself and his employees. , Bloomberg

(Bloomberg) --

The use of forced arbitration agreements — in which employees consent to resolving disputes in arbitration hearings rather than in open court — has come under fire since the #MeToo and Black Lives Matter movements helped expose how they’re used as a tool to keep sexual misconduct and racial discrimination complaints quiet.

Tesla’s effort to continue wielding these agreements is coming back to the fore at an inopportune time, buttressing critics of the company’s social and governance practices and undermining Elon Musk’s attacks on ESG.

A judge in Alameda County Superior Court near Tesla’s California car plant ruled this week that Jessica Barraza, a former night-shift worker who has alleged rampant sexual harassment at the factory, can proceed with her case in court even though she signed an arbitration agreement giving up her right to sue. Judge Stephen Kaus faulted Tesla for asking Barraza to sign an arbitration agreement only after she had already quit the job she left to join the automaker in 2018.

“Tesla either orchestrated this sequence of events on purpose or was unacceptably indifferent to the situation in which this placed Barraza,” Kaus wrote in his order denying Tesla’s motion to compel arbitration. “Basically, Barraza was ambushed.”

This was a setback Tesla didn’t need days after its chief executive officer lashed out at S&P Dow Jones Indices for removing the company — whose stated mission is to accelerate the world's transition to sustainable energy — from the ESG version of the S&P 500 Index.

Musk was already put on the defensive after S&P’s move by Insider’s report last week that SpaceX paid a flight attendant $250,000 to settle a sexual misconduct claim against him in 2018. It’s unlikely that starting a “hardcore litigation department” at Tesla, as Musk declared he would do, is the sort of action ESG adherents had in mind to address the issues S&P raised.

Tesla has managed to build a formidable brand that consumers equate with a clean-energy future. And the notion that going to work for Musk affords prospective hires a chance to change the world has helped him hire the best and brightest. The experiences Barraza has described, and the company’s handling of claims other former workers have made, have nicked Tesla’s reputation and risk hurting the company’s standing with top talent it’s looking to recruit.

Since Barraza filed her complaint in November, six more women have followed with their own lawsuits. All of the women share the same attorney: David Lowe of the San Francisco law firm Rudy, Exelrod, Zieff & Lowe. Barraza is still a Tesla employee; she’s currently on medical leave.

Each of the last two years, Nia Impact Capital, a social-impact fund based in Oakland, California, has proposed that Tesla prepare a report on its use of employee arbitration. Although the measure failed each time, there was a significant jump in shareholder support for it in October. Nia is likely to bring the resolution forward yet again when Tesla has its annual meeting in Austin, Texas on August 4.

This will be something to look out for when Tesla files its proxy for this year’s annual meeting. Musk’s electric-car maker is no longer a scrappy Silicon Valley startup. It’s a force to be reckoned with, boasting factories on three continents and more than 110,000 employees. As companies grow in size as well as influence, they come under more scrutiny, and investors demand more.

Like getting this newsletter? Subscribe to Bloomberg.com for unlimited access to trusted, data-driven journalism and subscriber-only insights.