I’m tasked with making a recommendation concerning arbitration agreements for our employees. My questions are: Do you recommend these agreements? For all employees? How do we go about establishing this for new and current employees? Any particular pitfalls to watch out for? — Elaine, HR Specialist in Encino
The typical employee arbitration agreement requires that all work-related disputes between the employer and employee be resolved by one or more impartial arbitrators instead of by a court trial. Many employers prefer arbitration over litigation because it can save everyone time and money. However, arbitration has some drawbacks as well, and not all claims can be arbitrated. Arbitration is not a one-size-fits-all solution, and employers will need to look at their particular situations when deciding whether they want to implement an arbitration policy for their employees.
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Although arbitration usually costs less than defending employee claims in court, it still can involve steep fees for employers. Employers typically must bear any fees that normally would not be incurred in a court action. Moreover, since arbitration can be quicker and less costly for employees than litigation, employees may be encouraged to bring claims to arbitration that they might not have brought to court.
Arbitration usually proceeds and is completed faster than court litigation, and unlike trial judgments, arbitration decisions are usually final. Employers may prefer this, as fighting over trial judgments at the appellate level can be costly and time-consuming. At the same time, however, this means that the employer may be stuck with an undesired outcome. Also, arbitration usually does not provide for dismissal of unmeritorious or frivolous claims, so employers may have to arbitrate these claims, even if a court would have dismissed them early in a trial.
The value of an arbitration agreement to a particular employer also will depend on the kinds of claims that are likely to arise. In California, an arbitration agreement can be enforced for various individual and class action claims. An arbitration agreement also can cover statutory employment discrimination claims, as long as the arbitration agreement meets specific requirements. An arbitration agreement, however, cannot preclude the employee from filing a claim with the U.S. Equal Employment Opportunity Commission. Nor can it prevent such government agencies from pursuing legal remedies on behalf of the individual or the public. Similarly, California Labor Code Section 229 provides that claims for unpaid wages may be brought “without regard to the existence of any private agreement to arbitrate.”
Arbitration agreements must be carefully structured to meet certain legal requirements. They will not be enforced if the terms and circumstances surrounding the signing of the agreement indicate unfairness or unequal bargaining. Employers would be well-advised to consult an experienced employment law attorney as they work on drafting enforceable agreements. In addition, keep the following points in mind:
- No condition of continued employment. Don’t threaten to terminate employees who will not sign an arbitration agreement. It is extremely difficult to enforce such “take-it-or-leave-it” agreements. An agreement stands a better chance of enforceability if existing employees are given a chance to opt out of the agreement and at least 30 days to review its terms and to resolve any questions.
- Mutuality. Both parties should be bound by the agreement. An agreement to arbitrate that states that only the employee must arbitrate (e.g., where the employee signifies “I agree,” “I understand,” or “I am waiving”), with no similar promise by the employer to arbitrate any claims against the employee, likely will not be enforced.
- Visibility and clarity. The terms of the agreement should be clear and not be hidden or in fine print so that employees cannot claim that they did not understand that they were binding themselves to arbitration when they signed the agreement.
- Limits on arbitration costs to employees. The agreement should not require an employee to pay more than he or she would have to pay in a court proceeding.
- Fairness and neutrality. The agreement must provide for a neutral decision maker as well as other components ensuring fairness and neutrality. One way to do this is to incorporate the rules of a recognized arbitration association.
- No limitations on damages or the statute of limitations period. The agreement should not restrict the employee from obtaining remedies that would be available in court or shorten the limitations period for bringing claims. An arbitration agreement that precludes recovery of attorneys’ fees, for example, could be found unenforceable as to claims under statutes that allow employees to recover such fees.
- Caution as to class action arbitration waivers. Some arbitration agreements prohibit class action suits and class arbitration, therefore only allowing arbitration on an individual basis. Whether these waivers are valid is still being disputed in the courts.
- Extra requirements for “public concern” rights. Certain statutory rights, including those established by the federal Fair Labor Standards Act, Age Discrimination in Employment Act, Americans with Disabilities Act, and California’s Fair Employment and Housing Act, are considered “public concern” rights, and arbitration agreements covering such claims will be subject to particular scrutiny by courts.
Sandra Rappaport, Esq., is a partner at the San Francisco office of the law firm Hanson, Bridgett, Marcus, Vlahos & Rudy. Amy Kang, who helped prepare this answer, is a summer associate at the same firm.