HR Management & Compliance

Arbitrating Employment Claims: Court Strikes Down Arbitration Clause; Important Details You Should Never Leave Out

Agreements to arbitrate employment disputes are more popular than ever with employers because they can help avoid expensive and risky litigation. They are also controversial because some believe it’s unfair to require employees to agree in advance to submit employment claims to arbitration, giving up the right to a jury trial and potentially huge damages. Nevertheless, courts generally uphold promises to arbitrate discrimination claims and other types of employment disputes.

But there is disagreement over how specific the language must be in defining the kinds of claims that will be covered. Now, a new court ruling demonstrates that the more explicit you are about what will be arbitrated, the more likely the agreement will withstand an employee challenge.

Employer Sued For Sexual Harassment

Rachel Renteria was a salesperson for Prudential Insurance Co. She signed a contract when she was hired promising that any disputes with Prudential would be resolved by arbitration instead of a trial in court.

Eventually, Renteria was fired. When she later sued Prudential for sexual harassment, the company tried to get the lawsuit dismissed on the ground that she had agreed to arbitration. Renteria, however, claimed that although she had made a general promise to arbitrate “disputes” when she was hired, she had not agreed to arbitrate employment-related claims.

It turned out that just a few days before Renteria was fired, the arbitration policy had been changed to specifically refer to employment disputes. But Renteria claimed she wasn’t told about the new policy so it shouldn’t apply to her.


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Arbitration Agreement Thrown Out

The federal court of appeal with jurisdiction over California struck down the arbitration agreement. The court pointed out that an employee can only be required to arbitrate employment discrimination disputes, including sexual harassment claims, if the person “knowingly” agreed to have an arbitrator decide such claims outside of court.

In Prudential’s case, the agreement neither spelled out the issues subject to arbitration nor specifically referred to employment disputes. Therefore, Renteria didn’t knowingly agree to arbitrate her sexual harassment claims.4 Also, the later revision of the policy to include employment disputes didn’t count because Renteria had no knowledge of it.

What You Should Do

Your arbitration agreements must include explicit details about the types of controversies to be covered. And caution is required if you decide to revise an existing, signed agreement. Here are some suggestions:

 

  1. Explain in detail what claims are covered. Specifically state that the agreement covers all disputes arising out of employment-including, but not limited to, claims for wrongful termination, defamation, breach of contract, emotional distress, harassment, and discrimination due to age, race, sex, disability or any other basis. Also explain that by agreeing to arbitrate employment disputes, the employee gives up the right to a trial in court. Keep in mind, however, that workers’ compensation, unemployment compensation, and wage and hour claims under state law can’t be arbitrated.

     

  2. Make the arbitration provision obvious. Employees will have a tougher time claiming they didn’t know they gave up the right to go to court if the words stand out. Print the arbitration language in bold type or highlight it rather than burying it in the fine print of an employment agreement or application. It’s even better to have the employee sign a stand-alone arbitration agreement or at least specifically initial the clause.

     

  3. Handle current employees carefully. Here’s where awkward problems can arise. If your arbitration language doesn’t specifically mention employment disputes, consider revising it and having employees sign new agreements. To avoid the contention that employees aren’t bound by the new language because they had to sign it or risk losing their jobs, you should offer them something of value in exchange for signing such as an improvement in benefits. You should do the same if you are asking existing employees to enter into arbitration arrangements for the first time. Also, it’s best not to fire or retaliate against workers who refuse to sign.

     

Important Pending Legislation

A bill was recently introduced in Sacramento that would invalidate most arbitration agreements (except in union contracts) signed by em- ployees before a dispute arises.7 While your employees could voluntarily agree to arbitration after a conflict develops, under this proposal you could not force a worker to do so. Plus there would be penalties of $5,000 per violation. If approved by the legislature and signed by Governor Wilson, employers will undoubtedly be hit with more lawsuits and higher costs. We’ll be following this legislation closely.

Free Publication Available

The American Arbitration Assoc- iation, one of several private arbitration services, has a new booklet with information on arbitrating employment disputes. For a free copy of “Resolving Employment Disputes,” call (415) 981-3901 in San Francisco or (213) 383-6516 in Los Angeles.

 

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