Organizations sometimes require employees to arbitrate claims or disputes that might arise during or after the employment relationship. Workers typically sign arbitration agreements when they’re hired but don’t always want to comply with them when there’s a dispute, and employees’ attorneys often want to present their case to a jury, not an arbitrator. Careful planning can help you avoid some common traps that result in arbitration agreements being invalidated.
Learn more about your state’s employment laws and how they interact with federal laws in your state’s Employment Law Letter
Arbitration vs. litigation
Arbitration is a form of alternative dispute resolution that has gained popularity over the years. Proponents tout it as a cheaper, faster, and more private method of resolving disputes. The parties don’t have to contend with crowded court dockets, lengthy trial delays, excessive discovery (the pretrial exchange of evidence), negative publicity, or juries awarding huge sums out of sympathy for the employee or bias against the company.
But arbitration isn’t perfect. The parties have to pay arbitrators for their time and other associated fees, which can be substantial. Also, appellate review of an arbitrator’s decision simply because he misapplied the facts or the law generally isn’t available. Thus, you might have to live with a bad decision.
Still, for many employers, arbitration is the preferred method for resolving employee disputes. Nevertheless, employees are constantly coming up with new and creative challenges to arbitration agreements. With that in mind, we’ve outlined five common traps that often determine whether the court will enforce or reject arbitration.
Trap #1: waivers
An arbitration provision, like any other contractual right, can be waived. In a recent case involving a large financial company, a former employee filed a complaint in federal court asserting claims of discrimination and harassment. The employee acknowledged the employer’s mandatory arbitration policy but contended that the company’s refusal to arbitrate while he was still employed banned arbitration after his lawsuit was filed.
The court disagreed. It noted that the company’s policy required arbitration of disputes based on “legally protected rights.” The employee’s alleged requests for arbitration, which involved challenges to promotion denials, didn’t necessarily fall into that category. Thus, the court concluded that the company didn’t waive its right to arbitrate the employee’s dispute. However, if you fail to request that the court compel arbitration early in the litigation process (before discovery and before any requests are made of the court), your right to arbitrate may be waived.
Trap #2: handbook disclaimers
Employers sometimes include arbitration provisions in their employee handbooks. But handbooks typically contain a disclaimer stating that their contents do not constitute an enforceable contract. While that makes sense for the majority of handbook provisions, the disclaimer may prevent you from enforcing the arbitration provision.
If you include an arbitration provision in a handbook, be sure it clearly states that the arbitration provision is binding and legally enforceable, even if the rest of the handbook is not. Perhaps a better alternative is to have a standalone arbitration agreement that employees are required to sign.
Trap #3: forcing the employee to pay costs
To initiate arbitration, a party must pay filing costs, which usually exceed the nominal amount required to file a lawsuit in state or federal court. Employees may be unable to pursue their statutorily protected rights if they are forced to pay filing fees.
As a result, courts have invalidated arbitration provisions that require employees to pay filing fees and other arbitration costs, such as the arbitrator’s fees. A valid arbitration agreement should state that the employer will pay all costs and fees.
Trap #4: limiting discovery or remedies
Title VII of the Civil Rights Act of 1964 and other antidiscrimination statutes exist to protect employees from unlawful discrimination in the workplace. You cannot prevent employees from pursuing such claims by unfairly limiting their discovery in arbitration or limiting remedies to which they would be entitled in court. Therefore, you should avoid including provisions in arbitration agreements that conflict with federal law.
Trap #5: one-sided agreements
Arbitration agreements should apply equally to the employer and its employees. Agreements that require the employee, but not the employer, to arbitrate claims or allow the employer the unfettered right to make changes without notice are typically not enforced.
Alternative to arbitration
These are just a few of the obstacles employers face in enforcing arbitration provisions. In light of these challenges and the costs associated with arbitration, some employers are turning to another solution: jury waivers. Like arbitration, jury waivers have benefits and drawbacks, and certain states — such as California — do not enforce them. Nevertheless, they are an alternative to consider when reviewing or implementing dispute resolution policies or agreements.
Arbitration agreements can be an effective tool for reducing the time and costs associated with employment disputes. However, if they’re not handled properly, they may result in extra costs without any of the intended benefits.
For more information on arbitration, jury waivers, or other employment law issues, please contact Mark Wiletsky at (303) 473-2864