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HR MATTERS E-TIPS
THIS WEEK'S E-TIP: Seven Steps to Effective Arbitration Agreements
June 19, 2007, Volume 9, No. 25
Published by Personnel Policy Service, Inc.
"Your Policy and Compliance Experts Since 1972"
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THIS WEEK'S E-TIP: Seven Steps to Effective Arbitration Agreements
Arbitration agreements can help your organization settle employment
disputes in less time and for less money than traditional litigation.
However, they only work if they are properly written and implemented.
So, be sure you consider these seven tips to ensure your agreements
are fair and enforceable. |
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From Your HR Matters E-Tips Editors
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THIS WEEK'S E-TIP: Seven Steps to
Effective Arbitration Agreements
Ever since the Supreme Court gave the green light to
arbitration
agreements in Circuit City Stores Inc. v. Adams, 532 U.S.
105 (2001),
more employers have turned to arbitration as a means to settle
employment disputes quickly and cost-efficiently. However, even
though
the Court ruled in the Adams decision that arbitration
agreements could
be enforced, it did little to address exactly how the process
should work
in order to ensure that it is fair to employees.
As a result, employers have had to wade through a maze of court
decisions to determine what arbitration systems will be
considered
enforceable. In particular, issues that continue to be litigated
include
whether there was a knowing and voluntary agreement and whether
the
employee was given adequate opportunity to present his case.
Below,
you will find out the seven elements you should consider to make
sure
your arbitration agreements are enforceable.
Arbitration Defined
Arbitration is a quasi-judicial proceeding in which formal
testimony is
presented before an objective third-party arbitrator who than
renders a
decision. The arbitrator's decision is final and binding on the
parties, and
appeal from an arbitration decision is not normally possible.
Appeals are
available only if: (1) the arbitrator is biased or is guilty of
fraud or
misconduct; (2) the arbitrator exceeds the arbitration
agreement's
authority; or (3) the arbitrator's decision is irrational and in
manifest
disregard for the law.
Developing case law has contributed to an increased use of
arbitration.
Courts previously were split as to whether agreements to
arbitrate
employment disputes were enforceable under the Federal
Arbitration Act
(FAA), the federal law governing these agreements. But since the
2001
Supreme Court decision in Adams declared most arbitration
employment
agreements enforceable, debate in the courts has shifted to the
terms
needed to make them legally binding.
The Equal Employment Opportunity Commission (EEOC), however,
opposes the use of mandatory arbitration agreements requiring
the
arbitration of
discrimination claims. In a policy statement, the EEOC
complained that these agreements deny employees access to courts
and
prevent courts from playing a meaningful role in enforcing the
civil rights
laws.
Accordingly, the EEOC has instructed its investigators to
continue to
pursue charges of discrimination without regard to arbitration
agreements and, when agreements are used, to scrutinize closely
whether they were coerced. The Supreme Court, in EEOC v. Waffle
House, Inc., 534 U.S. 279 (2002), upheld the EEOC's right to sue
an
employer for discrimination on behalf of an employee, even when
the
employee signed a contract agreeing to settle all claims using
binding
arbitration.
Benefits of Arbitration
In spite of the contested issues, arbitration offers some
significant
advantages to both employees and employers. Besides lowering
costs
and speeding resolution of disputes, arbitration can be
attractive
because it allows employers to avoid jury trials. Jurors often
harbor a
sympathetic bias in favor of employees with whom they identify,
regardless of the legal issues or particular facts of the case.
Arbitrators,
on the other hand, generally seek to create a compromise that is
intended to resolve the issue fairly.
Other benefits include the fact that the relative informality of
arbitration
can stimulate creative solutions that would not surface in an
adversarial
court proceeding. In addition, even when employees win in
arbitration,
the awards generally tend to be smaller than jury verdicts.
Furthermore,
employees usually view arbitration as a fair process because the
arbitrator is selected by agreement between both parties and the
proceedings allow employees to present their side in an
impartial setting. |
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Seven Elements to Help Ensure
Enforceability
The Supreme Court's decision in Adams did not shed any light on the
nature and scope of enforceable arbitration agreements. Therefore,
these agreements often are subject to litigation challenging the
enforceability and fairness of the actual arbitration proceedings.
Courts analyzing the fairness of the procedures generally consider two
issues: (1) whether there was a knowing and voluntary agreement and
(2) whether the employee was given adequate opportunity to present his
case. To achieve this fairness, recent court decisions identify at least
seven elements that you should include in your arbitration agreements.
- A clear delineation of claims subject
to arbitration. The
agreement should specifically state what types of employment claims
will
be arbitrated, such as all discrimination and wage and hour claims.
- No limitation on the
statutorily-imposed remedies. You cannot
ask employees to waive any remedy they would normally be entitled to
under federal or state law.
- Adequate discovery. Make sure that
employees can gather
sufficient information from your organization regarding their claims,
just
as they would be allowed to in a jury trial.
- Adequate safeguards to ensure neutral
arbitrators. Courts
usually prefer that employees be involved in picking the arbitrators
and
that the arbitrators do not have strong ties to the employer.
- No unreasonable fees or costs to the
employee. Courts typically
have determined that "fee shifting" and "fee sharing" arrangements
where the employee pays a portion of the arbitration costs are okay as
long as costs are not exorbitant or deter the employee from pursuing a
claim.
- A provision requiring a written
decision that contains sufficient
detail to ensure meaningful judicial review.
- Adequate consideration in exchange for
the agreement to
arbitrate. Typically, the agreement must be supported by some extra
benefit to the employee, such as continued employment.
Note, too that even if an arbitration
agreement contains an invalid
provision, some courts still may enforce the remainder of the agreement
without giving effect to the unacceptable terms.
State Law May Limit Arbitration
You also should check state law when drafting an arbitration agreement.
A few states have enacted legislation prohibiting all arbitration
agreements between employers and employees or prohibiting the
arbitration of specific claims. For example, California's Labor Code
allows an employee to sue for unpaid wages even if the employee has a
private arbitration agreement covering wage claims. Kentucky and Idaho
prohibit written agreements to submit employment disputes to
arbitration.
However, several states have passed laws in favor of arbitration,
including Colorado, Maine, Minnesota, and Montana.
Consider Arbitration
Arbitration agreements have been a staple of union contracts for
decades. Now, many nonunion employers use them to help limit jury
trials and to provide a fair and effective forum for employment-related
disputes.
However, arbitration agreements can cause headaches if drafted
improperly. To avoid problems, they must be fair to employees and
allow them to resolve claims in as impartial a forum as possible. To
help
ensure enforceability, you should make sure to address the seven
elements discussed above. And, for added protection, get your attorney
to draft, or at a minimum review, the agreement. |
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Subscribers to the
Personnel Policy Manual and HR Policy Answers on
CD can find more information on arbitration in
Dispute Resolution
Procedure, Chapter 904, notes 3 and 15.
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Information provided in HR Matters E-Tips is researched and reviewed
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