Too Poor for Arbitration? Employee’s Financial Situation Must Be Considered

Arbitration agreements can be a great way to manage the risk and expense of litigation. However, you must ensure that your arbitration agreement is enforceable.

The Appellate Division, First Department in New York, recently reversed a lower court’s decision and sent the case back for further proceedings out of a concern that the employee lacked the financial means to arbitrate the dispute. The Appellate Division held that the lower court must consider the employee’s financial circumstances and the costs of arbitration before compelling him to submit to arbitration.

Background

“Marcus” sued his employer, Kent Security of New York, Inc., for untimely payment of wages. Kent moved to compel arbitration pursuant to the parties’ previously signed arbitration agreement, which provided that any claims arising out of Marcus’ employment had to be submitted to arbitration. The agreement also provided:

1. The arbitration would be held in Miami-Dade County, Florida.
2. The prevailing party would be entitled to recover costs and attorneys’ fees from the loser.
3. If the American Arbitration Association rules were applied, the costs of arbitration (except for witness fees) would be split between the parties.

Marcus attempted to avoid arbitration by arguing that he didn’t agree to arbitrate the specific labor law violation he alleged and arbitration would be financially impossible for him, thus preventing him from bringing his claims. The New York County Supreme Court granted Kent’s motion to compel arbitration over Marcus’ objections. Marcus appealed to the First Department.

Weighing the Cost of Arbitration

On appeal, the First Department held that the broad arbitration agreement covered Marcus’ employment-related claim, but an inquiry was needed to determine the financial hardship question. Under New York law, a trial court must review a litigant’s claims that he cannot financially afford to bring or defend a claim in arbitration, especially if he can prove that arbitration would be significantly more expensive and burdensome than litigating the claim in court.

In sum, the court must consider, at a minimum, “(1) whether the litigant can pay the arbitration fees and costs; (2) what is the expected cost differential between arbitration and litigation in court; and (3) whether the cost differential is so substantial as to deter the bringing of claims in the arbitral forum.”

The First Department held that if Marcus truly cannot afford the costs of arbitration, the matter may have to proceed in New York rather than Florida. Further, the First Department held that the fee-sharing and attorneys’ fees provisions of the arbitration agreement can be considered when comparing the overall costs of arbitration to litigation.

Since the supreme court didn’t consider the “affordability” test, the appellate court sent the case back so the test could be applied. Adams v. Kent Sec. of New York, Inc., No. 161589/15, 2017 WL 6612609, at *1 (N.Y. App. Div., Dec. 28, 2017).

Is Your Arbitration Agreement ‘Too Favorable’?

Arbitration is generally considered a favorable way to resolve employment claims because it’s more private than traditional litigation and it allows you to better control the costs and risks of a dispute. In addition to the fear of runaway jury verdicts, discovery (or pretrial fact-finding) presents a significant expense that sometimes forces employers to settle lawsuits. It’s no wonder that employers prefer arbitration.

However, you must be cautious when drafting an arbitration agreement to ensure that it will be enforceable. Here, the arbitration agreement was broad enough to cover all of the employee’s claims, but it may have been “too favorable” to the employer (i.e., because it was too costly for the employee). By requiring that arbitration take place in Florida and that the employee split or pay all of the fees, the employer may have forfeited its right to arbitrate the dispute. As a result, it could be forced into a traditional (and more expensive) lawsuit.

Be calculated about what you want out of an arbitration agreement. Sometimes eating the costs of arbitration or holding the arbitration proceeding closer to home can be money well spent if you want a court to enforce an arbitration clause. Don’t be penny-wise and pound-foolish. Consult with employment counsel about how to draft an enforceable agreement.

Angelo D. Catalano, an editor of New York Employment Law Letter, can be reached at acatalano@cglawoffices.com or 607-723-9511.