Green Light For Arbitration Clauses In Employment Agreements

February 15, 2008

In the past, many employers were reluctant to include arbitration clauses in their employment contracts and applications. These clauses require nonunion employees to submit job-related disputes to binding arbitration -- if they had agreed to do so as a condition of employment. The problem for employers was that state and federal courts didn't always enforce arbitration clauses. This was the case even though the Federal Arbitration Act (FAA) provides that parties who sign binding arbitration agreements are bound by them, except for workers engaged in "foreign or interstate commerce."

But the U.S. Supreme Court removed much uncertainty in 2001 in Circuit City v. Adams. The Court held that the FAA exempts only transportation workers' employment contracts.

Let's take a look at the Court's decision and consider why employers may want to include arbitration clauses in their employment agreements.

The Facts of the Case

A provision in an electronics retailer's job application required all employees to settle employment disputes by binding arbitration. After a salesman was hired, he filed a state-law employment discrimination action against the employer. The employer went to federal court and persuaded it to enjoin the state-court action and compel arbitration under the FAA. The employee appealed to the Ninth Circuit. It reversed, interpreting the FAA to exempt nearly all workers from the act's provisions. The employer appealed to the Supreme Court, and it interpreted the FAA exemption more narrowly. The Court held that the FAA's exemptions are confined to "transportation workers actually engaged in the movement of goods in interstate commerce."

In other words, employers in industries other than transportation can reasonably expect courts to enforce properly written arbitration clauses to compel workers who sign them to arbitrate rather than litigate job-related disputes.

Arbitration Is Nicer Than Litigation

Why should employers favor arbitration over litigation as a way to resolve employment-related disputes? Here are some rather compelling reasons:

Arbitration tends to save time and money.
Arbitration proceedings and awards can be kept confidential -- unless both parties agree otherwise.
Arbitrators are typically professionals with experience in the industry and an understanding of workplace realities.

Arbitrators tend to be less biased in favor of employees and less likely to award huge damages than juries, which often favor employees. (After all, jurors are more often employees than employers).

Of course, arbitration is not perfect for resolving every employment-related dispute, and not all employers should jump headlong into using arbitration clauses. One drawback is that workers may feel coerced into agreeing to the clause if that's the only way to get the job. They may perceive -- perhaps unjustifiably -- that you're forcing them to sacrifice their right to have a court resolve disputes. This may lower morale.

But in many cases, arbitration is advantageous to both sides because it can be quick, inexpensive and fair. In fact, according to the American Arbitration Association, most arbitration procedures include mediation (outside help in settling a dispute) as a preliminary step, and a large percentage of disputes is resolved in mediation -- which is even quicker and cheaper. If in doubt, explore with your lawyer the benefits and risks of including an arbitration clause in your employment contract.

Unanswered Questions

What makes for a properly written arbitration clause is a matter that the Supreme Court didn't address (see "Make It Enforceable" on page 2). Other questions that the Supreme Court left unanswered include:

Can a mandatory arbitration clause limit class actions or punitive damages?
If the EEOC takes employers to court based on a complaint filed by a worker covered by an arbitration clause, can the worker win damages as well as injunctive relief?
Should employers be required to pay all arbitration costs and fees if workers must agree to arbitration as a condition of employment?

State Laws Vary

Because of these unanswered questions, and because state employment laws vary, ask your attorney to review your employment contracts before employees sign them. Then explain arbitration's benefits to your employees and demonstrate that you respect -- and intend to protect -- their right to have disputes resolved fairly.

In many cases, arbitration is advantageous to both sides because it can be quick, inexpensive and fair.

Make It Enforceable

To be enforceable, an arbitration clause must be fair to both sides. Employers whose arbitration clauses lack safeguards risk being unable to enforce the agreement and may wind up in court after all. Neither the Federal Arbitration Act nor the U.S. Supreme Court has offered any guidelines on how to write a clause to ensure its enforceability. But here are some suggestions:

The arbitration clause must be clear and simple enough for the average worker to understand.
Workers must voluntarily enter into the agreement, and not because of the overwhelming disparity in economic power between employer and employee. (Some courts have questioned whether someone needing a job really does agree voluntarily when the alternative is to be denied the job opportunity.)
The clause should spell out salient arbitration procedures -- such as how impartial arbitrators will be selected -- and provide for liberal discovery rules and a written opinion by the arbitrator. The American Arbitration Association (www.adr.org) and similar organizations provide written procedures that your arbitration clause can reference.
The clause should afford workers all remedies -- such as punitive damages -- that would be available through a civil court proceeding.

The clause should specify any limits on what kinds of disputes will be arbitrated. For example, it may exclude complaints brought under Title VII of the Civil Rights Act. Or the clause may broadly include all job-related disputes.
The cost of arbitration should not be a barrier to settling disputes, because a court is likely to rule that arbitration must be affordable -- even for nonhighly paid workers.
The agreement must include "consideration"; that is, the employee must get something of value (a new job, a raise, a promotion or a bonus) in exchange for the agreement.