To arbitrate or not to arbitrate
by Philip J. Siegel
Some roofing contractors have received Equal Employment Opportunity Commission (EEOC) charges filed by employees alleging unlawful discrimination or harassment. Regardless of whether such charges have merit, they may blossom into costly, time-consuming litigation.
In such situations, an employer often incurs significant legal costs and business inefficiencies when company time is spent on a lawsuit. Employers wishing to avoid the time and expense of litigation often settle out of court. But many employers may be unaware of one of the most effective tools that can be used to limit litigation expenses while reducing the time spent handling these types of claimsthe predispute arbitration agreement.
What it is
A predispute arbitration agreement allows an employer to remove employment disputes from a courtroom and causes them to be resolved by an alternative dispute-resolution process, which usually is quicker, less expensive and safer for employers.
This alternative dispute-resolution process is considered safer because a matter may be resolved by an expert in employment disputes as opposed to a jury that may consist entirely of employees who may, unknowingly, be partial toward an employee claiming discrimination.
The time and money savings arbitration provides make predispute arbitration agreements one of the most effective means of managing employee lawsuits. Until recently, however, the enforceability of predispute arbitration agreements in the employment context was in doubt. That doubt, however, no longer exists.
In a widely anticipated decision, the U.S. Supreme Court ruled in March 2001 that employers can require employees to resolve all employment-related disputes through arbitration rather than litigation.
The Circuit City case
In Circuit City Stores v. Adams, the plaintiff, Saint Clair Adams, signed an employment application that contained a clause by which he agreed to arbitrate "any and all … claims, disputes or controversies" related to his employment. He later sued his employer in California state court alleging harassment because of his sexual orientation.
Circuit City filed suit in federal district court seeking to stop Adams' lawsuit in state court and force Adams to settle his claim through arbitration based on his employment agreement. The federal district court stopped Adams' lawsuit and ordered him to take his claims against Circuit City to arbitration. Adams appealed the district court's decision, and the 9th U.S. Circuit Court of Appeals held that the Federal Arbitration Act (FAA) (the statute that addresses enforcement of arbitration agreements) did not apply to employment contracts. Consequently, Adams was permitted to pursue his claims in state court. Circuit City appealed the 9th Circuit Court's decision to the U.S. Supreme Court.
In reversing the 9th Circuit's decision, the Supreme Court held that FAA compels judicial enforcement of arbitration agreements in employment contracts. Although FAA provides for federal court enforcement of written arbitration agreements in transactions involving commerce, it excludes employment contracts of "seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce."
In reaching its decision, the Supreme Court reasoned that the FAA section that exempts contracts involving seamen, railroad workers, and any other class of workers engaged in foreign or interstate commerce was limited to employment contracts of workers actually engaged in the movement of goods in interstate commerce. The court acknowledged that its decision effectively pre-empts state laws that limit the use of arbitration agreements in the employment context.
But the court faced critics who claimed arbitration agreements force employees to surrender rights they otherwise would have in federal and state courts. The court answered these critics by explaining that by signing a predispute arbitration agreement, an employee does not lose any substantive rights provided by law. Rather, by agreeing to arbitrate, the employee is only agreeing to pursue his substantive rights in arbitration as opposed to a court of law.
As a result of the Supreme Court's decision in the Circuit City case, roofing contractors now can compel employees to sign arbitration agreements as a condition of employment and have the agreements enforced under federal law. The court's decision is in accord with other cases that expanded the reach of arbitration agreements in the employment context. Now, arbitration will be permitted even in cases that assert claims under federal civil rights statutes, including claims of age, race and sexual discrimination.
Although the Circuit City case gives employers broad power to enforce arbitration agreements with employees, some caution is warranted. Recent challenges to mandatory arbitration agreements based on procedural fairness and equity arguments have made it clear that arbitration agreements need to be balanced and carefully constructed to be enforced.
Words of caution
Arbitration requires an agreement or contract between affected parties to submit their dispute to arbitration. The use of arbitration clauses in employment contracts and other forms, such as employment offer letters, applications and personnel policies, is a way to secure, in advance, employees' consent to binding arbitration to resolve employment disputes.
Regardless of the Supreme Court's decision in the Circuit City case, if you desire to use a predispute arbitration agreement, you must ensure the agreement is not completely in your favor and does not deprive employees' due-process rights. The basic equity-based exceptions to contract enforcement, such as unconscionability, fairness and the duty to draft in good faith, still are present and likely will be the primary focus of arbitration agreement challenges in the future. Consult an attorney before drafting such agreements.
To ensure FAA will enforce a predispute arbitration agreement, be sure your arbitration agreement includes the following:
With regard to the first requirement, courts have refused to enforce arbitration agreements that involve an arbitrator-selection process that requires employees to select an arbitrator from an employer-provided list. The provisions were struck down because an arbitrator appearing on an employer's list may favor the employer for fear his name will be removed from the list. To ensure your arbitration agreement is enforceable, provide a list of neutral arbitrators from an organization such as the American Arbitration Association and allow each side to delete names until an arbitrator is chosen.
- A statement that a neutral arbitrator will be appointed through the American Arbitration Association
- A provision for adequate discovery
- A statement that a written decision will permit limited judicial review
- All relief, including compensatory damages, punitive damages and the recovery of attorneys' fees, which may otherwise be available in court
- Cost limitations (the employee may be required to pay no more for arbitration than he would have to pay for court proceedings, which effectively requires you to bear the cost of arbitration)
An enforceable arbitration agreement also must provide for sufficient discovery to adequately arbitrate a statutory claim, including access to essential documents and witnesses as determined by the arbitrator, subject to limited judicial review. Discovery should include the right to seek document production and at least a limited right to conduct depositions though the arbitrator may decide the extent of such rights.
An arbitration agreement also must provide for a written verdict that sets forth the essential findings and conclusions on which the verdict is based. Arbitration agreements can be attacked if they seek to limit remedies available to employees.
The requirement that employees' costs of arbitration be limited has been the subject of substantial litigation. Courts have struck down arbitration provisions where employers have attempted to shift some or all the burden of arbitration costs to employees. Some courts have refused to enforce arbitration agreements that attempted to split arbitration costs evenly between the employer and employee.
Other challenges to arbitration agreements have focused on claims and arguments alleging inequality of bargaining power between the employer and employee. The arguments have proved unsuccessfulthe Supreme Court explicitly has rejected the concept that mere inequality of bargaining power is enough to set aside an arbitration agreement.
Moreover, state laws that attempt to place stricter contract formation rules on arbitration agreements than exist under FAA will not apply because state statutes are pre-empted by FAA and, therefore, will not control the enforceability of arbitration agreements.
In addition to the requirements, you also should consider an agreement's form and its description of coverage. An arbitration agreement that consists of a separate contract signed by both parties is the most defensible. But arbitration agreements can be found in handbook policies, employment applications and/or offer letters.
When providing an arbitration agreement in an employee handbook, you may have to argue the arbitration policy is a contract. Employers generally do not want employee handbooks to be considered contracts because handbooks then become contracts to which employers are obligated to comply with every provision within them. Some courts have declined to enforce arbitration policies in employee handbooks for these reasons or because of an employee's lack of notice of the policy. Consequently, you risk not being able to enforce an arbitration agreement found solely in a handbook.
To combat this, have employees sign the arbitration provision within the handbook or an acknowledgment agreeing to be bound by the arbitration agreement. An employee handbook should explicitly state the arbitration policy and at-will provisions are contractual while other general policies are not.
Note that some courts have refused to order arbitration if an arbitration agreement only addressed disputes arising from a contract or agreement and such disputes were limited to claims concerning termination, not discrimination or harassment.
Therefore, if you want employees' statutory claims to remain subject to arbitration, draft a provision that explicitly states the agreement will cover statutory and nonstatutory claims.
Is arbitration right for you?
Before implementing an arbitration policy, consider the advantages and disadvantages of arbitration. Arbitration is a relatively quick, efficient and legally binding means of resolving workplace disputes. It shortens the often expensive and time-consuming litigation process. Arbitrators often are expert decision makers with specific knowledge and experience as opposed to jurors who often are unpredictable.
Potential disadvantages to arbitration include a fear of proliferation of employee disputes, especially given the less expensive nature of arbitration. Arbitrators' decisions that are pro-employee are difficult to overturn because judicial review of an arbitrator's decision is limited. This may create risk for you, especially when crucial discovery may be barred and relaxed evidentiary rules may lead to undesirable and otherwise inadmissible evidence. In court, there also is the ability to appeal, but the ability to appeal an arbitrator's decision is extremely limited.
Other disadvantages include the tendency of arbitrators to provide both parties some relief to resolve a dispute. Additionally, arbitration can be frustrating if you have strong legal defenses for having the case dismissed at an early stage by, for example, a summary judgment motion (a motion a party can raise in court when there is no dispute regarding material facts and, based on undisputed material facts, the party is entitled to judgment as a matter of law).
An arbitration provision also inadvertently may limit your ability to seek injunctive or equitable relief on claims of use or disclosure of trade secrets and confidential information.
Although the Circuit City case gives you the right to implement arbitration agreements, a question remains as to what role EEOC and similar state and local agencies play in pursuing enforcement claims made by employees required to submit their claims to arbitration. EEOC takes a small number of cases to federal court where it tries to make an example of discriminators by winning money or other damages. The government maintains EEOC has a duty to do so even if an alleged victim is bound by an arbitration agreement.
In Equal Employment Opportunity Commission v. Waffle House Inc., the Supreme Court will decide whether EEOC can proceed with its case against an employer on behalf of an employee bound to an arbitration agreement. Recognizing EEOC's role to combat widespread workplace discrimination, the 4th Circuit Court of Appeals allowed EEOC to continue seeking equitable relief in court but precluded the agency from pursuing monetary damages because employees already agreed to arbitrate their issues. A decision in this case is expected in early summer 2002.
Congress also has responded to the Supreme Court's decision in the Circuit City case. On June 21, Rep. Dennis Kucinich (D-Ohio) introduced the Preservation of Civil Rights Protection Act of 2001, which seeks to amend FAA by providing that all employment arbitration agreements are unenforceable unless the employer and employee voluntarily consent to arbitrate disputes after they have arisen. This act was referred to the Judiciary and Education and Workforce committees.
Each employer should assess its own workplace needs and decide whether to develop a mandatory arbitration policy. If you decide to implement an arbitration policy, craft your predispute arbitration agreement in a way that best meets business goals and objectives while incorporating certain procedural safeguards. If procedural safeguards are met, expect to experience savings in time and legal expenses.
Philip J. Siegel is an attorney with the Atlanta-based law firm Hendrick, Phillips, Schemm & Salzman.