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Tesla employee arbitration policy under fire from activist investor

SAN FRANCISCO — When Tesla Inc.’s shareholders gather Sept. 22 for their annual meeting, Kristin Hull will have roughly three minutes to make the case against the company’s use of mandatory arbitration for employee sexual harassment and racial discrimination claims.

Hull is the CEO of Nia Impact Capital, a social impact fund based in Oakland, Calif., that invests in several sustainable energy companies. Tesla is its biggest name and among its largest holdings. Late last year, she filed a first-of-its-kind proposal for a Tesla shareholder resolution.

The ask: for the board of the Palo Alto, Calif.-based EV maker, which has over 60,000 employees globally, to prepare a report on its use of employee arbitration.

Most people who work directly for Tesla sign away their rights to a trial. Hull wants to know how many discrimination and harassment cases go to arbitration, how much that’s costing the company, and investors, and the demographics of those bringing the claims.

“We are in this to win this,” said Hull during a socially distant interview in Oakland’s historic Preservation Park, near Nia’s office. “It’s the issue of our time, and it’s a Civil Rights issue. Elon Musk can’t be given a pass for that with the company he runs.”

The widespread use of forced arbitration has come under fire since the #MeToo movement exposed it as a tool that effectively keeps harassment complaints quiet. In recent years, employee and shareholder activists pushed several large companies, including Facebook Inc., Microsoft Corp., Uber Technologies Inc. and Lyft Inc. to end its use for sexual harassment cases.

But racial dynamics are just as pernicious, and Black Lives Matter is now drawing more attention to its role in discrimination claims.

“Arbitration is used as a form of claim suppression,” Cliff Palefsky, a San Francisco employment lawyer, who has testified before Congress about mandatory arbitration, said of the practice broadly. “Instead of court, it’s a secret tribunal with no right of appeal.”

Tesla’s board opposes the proposal. In a proxy statement it said Nia has not stated “convincing support for a correlation between arbitration and harassment, discrimination or limits on employee grievances generally.” The company added that it is committed to maintaining a diverse and inclusive workforce and says arbitration offers an alternative form of adjudication that is often quicker than trial, and just as fair.

Tesla’s communications director, board Chair Robyn Denholm, and Vice President of People Valerie Workman did not respond to inquiries about the resolution.

Institutional Shareholder Services Inc. and Glass Lewis, the two leading proxy advisory firms, have recommended shareholders vote for the proposal.

“Although the company’s code of conduct bans harassment and discrimination in the workplace, Tesla has faced multiple allegations of racial discrimination and harassment at its factory in Fremont, California,” said ISS in its analysis.

Tesla’s largest institutional shareholders, including Scottish investment firm Baillie Gifford and Vanguard, typically conduct their own research and do not discuss how they plan on voting. Calvert Research & Management has indicated it will vote for it. The proposal needs majority investor support to pass.

The EV maker’s stock, which recently split, is up almost 300 percent this year. CEO Elon Musk is the largest shareholder with an 18 percent stake, and even after Tuesday’s sell off, the world’s fifth richest person.

When it comes to transparency on diversity and inclusion, Tesla falls behind even some of its Silicon Valley neighbors. Unlike Facebook, Alphabet Inc. and Apple Inc., the company has never released diversity statistics. Its corporate website doesn’t include an organizational chart, and the only management officials listed on its investor relations page are four male executives.

In recent years, Tesla has faced high profile allegations of racial discrimination at its Fremont plant, where roughly 10,000 people work. In late 2017, a Black worker, Marcus Vaughn, filed a lawsuit saying the plant was a “hotbed of racist behavior.” Tesla responded to Vaughn’s case with a lengthy blog post titled “Hotbed of Misinformation” that said the company had investigated the alleged incidents and fired three people as a result.

In 2018, Owen Diaz and his son Demetric filed suit as well, alleging a pattern of racial harassment and hostility. Demetric dropped his suit voluntarily, but Owen’s case is slated for trial before a federal judge in San Francisco in October. The company said in an emailed statement to Bloomberg at the time that it takes discrimination and harassment of all forms “extremely seriously” and has a dedicated team focused on investigating and addressing workplace concerns.

All three men were contract workers, so they never signed arbitration agreements. Tesla argued that Vaughn’s case shouldn’t go to court anyway; the car-maker lost that appeal.

Complaints filed

Since 2014, workers have filed 145 complaints with California’s Department of Fair Employment and Housing alleging discrimination at Tesla on the basis of race, age, gender, disability, medical leave, pregnancy, sexual orientation, and national origin, according to a synopsis provided by the agency after a California Public Records Act request.

This May, three separate people alleged they were forced to quit because of their race. While the state issued right-to-sue letters in all three cases allowing them to proceed in court, it’s possible they’ll be bound by arbitration clauses. Tesla did not respond to a request for comment on the complaints.

Arbitration has long been the bane of employment discrimination lawyers. Instead of having a hearing before a jury, cases go in front of an arbitrator, which industry data shows are overwhelmingly older White men.

Transcripts usually aren’t available to the public, keeping bad actors out of the public eye and allowing inappropriate behavior to go unchecked.

“The deck is stacked in a much less favorable way for employees,” said Hilary Hammell, an employment discrimination attorney at Levy Vinick Burrell Hyams LLP in Oakland, who has written about how forced arbitration can hurt Black workers.

Employers, and their lawyers, argue that the process is expedient, just, and cost-effective. And in the era of COVID-19, arbitration proceedings can be conducted remotely, while jury trials have largely ground to a halt.

Other battles

For Hull, this isn’t her first time pushing companies for more transparency. In June, she got 70 percent support from shareholders at cyber-security company Fortinet Inc. for a proposal requiring the firm to release an annual diversity report.

Tesla will be tougher: Hull doesn’t know if she’ll get enough support. The annual meetings tend to be love fests for Musk and the company he built. Musk’s presentation takes center stage, while voting on resolutions is typically a short and straightforward affair.

“Some investors are like: ‘What are you doing? Tesla is way too big,’” Hull said.

But even if the resolution fails, she sees it as the opening salvo in a much larger, and longer, campaign.

“If we lose, we will come back with way more investors,” she said. “We’ve put a stake in the ground.”

With assistance from Josh Eidelson. Kristin Hull is not related to the author of this story.

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