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HR Magazine, August 2001: - Reaching Out

By Jonathan D. Wetchler  8/1/2001
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HR Magazine, August 2001 
Vol. 46, No. 8

Forcing an employee's hand may not be your best bet.

Agreements to Arbitrate

The U.S. Supreme Court has given a substantial boost to a growing trend: Requiring employees to arbitrate, rather than litigate, employment disputesparticularly for claims of employment discrimination.

In Circuit City Stores, Inc. v. Adams, 121 S. Ct. 1302 (2001), the court held that the Federal Arbitration Act, which requires the enforcement of valid arbitration agreements, applies to most employment contracts and exempts only those employment contracts that involve transportation workers.

As a result, properly drafted agreements that require the arbitration of employment claims now are clearly enforceable.

Lured by the dual prospects of lower litigation costs and avoiding runaway juries, many employers have seized the opportunity to require employees to arbitrate their claims and forego their right to file suit.

But rushing into arbitration isnt necessarily the best bet in every situation. This article describes 10 issues employers should consider when determining whether to require arbitration or when structuring arbitration agreements.

#1: Whether to Require Arbitration
Perhaps the most important issue for employers to consider is whether or not they should require arbitration at all.

Initially, it may be hard to find a reason not to arbitrate. After all, arbitration generally involves less discovery and formal procedural requirements than court litigation, with a commensurate reduction in legal paperworkand expenses.

While arbitration generally costs less than litigation, it also imposes two costs that typically are overlooked. First, the factors that make arbitration more economical for employers apply equally to prospective plaintiffs. As a result, requiring arbitration may increase the likelihood that employees will bring claims against their employers, and this may increase the likelihood that employers will face more marginal cases.

Second, it often is more difficult to have frivolous claims dismissed by filing a motion in an arbitration proceeding than in federal court. Accordingly, employers may find themselves arbitrating cases that might have been summarily dismissed in court.

The lack of an effective mechanism for dismissing legally deficient claims by motion can be particularly detrimental to employers, given that some arbitrators try to resolve disputes in King Solomon-like fashion by splitting the baby.

In another way, the lower cost of arbitration also may work against employers, whose deeper pockets can be more of an advantage in court litigation. In formal litigation, employers can gain a strategic advantage by litigating aggressively, which can include motion practice as well as taking more (or more complete) depositions and serving more numerous and comprehensive written discovery requests.

But, typically, employers are more than happy to achieve the cost savings arbitration provides, even if it means not taking full advantage of their superior economic resources.

Which employers should require arbitration? Employers facing a steady stream of claimsand particularly those with a track record of expensive settlements or adverse verdictsmay find arbitration to be a more cost-effective tool than litigation. The same is true for employers that cannot afford the economic burdens of employment litigation.

However, for employers that can afford the cost of litigation and do not have a history of prior employment litigation, the case for requiring arbitration is not compelling.

#2: Limitations On Remedies
Some employers may be tempted to limit what employees may recover through arbitrationby, for example, setting caps on damages or eliminating certain remedies altogether, such as punitive damages. Provisions of this kind, however, are inadvisable. By limiting these rights, employers run the risk of rendering the arbitration agreement legally unenforceable.

For an arbitration agreement to be enforceable, employees must be able to recover the same remedies available to them in court. To enhance the likelihood that an agreement will be legally acceptable, the agreement should state that the arbitrator will have the power of a court of law and equity.

#3: Loser-Pays Provisions
Many employers that face claims under fee-shifting statutes, such as the Age Discrimination in Employ-ment Act and Title VII of the Civil Rights Act of 1964, believe that these laws provide plaintiffs with an unfair advantage: If the plaintiff wins, the employer pays the plaintiffs legal fees; if the employer wins, the parties bear their own fees.

This perception of unfairness is exacerbated by the fact that substantial fees may be awarded even if the plaintiff receives a relatively low damage award.

The courts have yet to agree on the legality of arbitration clauses that require the losing party to pay the fees of the prevailing party in equal employment opportunity cases. Such clauses would, arguably, level the playing field by permitting victorious employers to recover their counsel fees.

On the heels of the Circuit City decision, the Equal Employment Opportunity Commission (EEOC) voiced its intent to challenge arbitration agreements that alter rights concerning the recovery of fees. So, while it may appear desirable to adopt provisions of this nature, the end result may be court litigation over whether the provision, or even the entire agreement, is enforceable.

Since the goal of an arbitration agreement is to avoid litigation, many employers simply forgo attempts to contractually limit the allocation of counsel fees. Employ-ers interested in a more aggressive position may adopt provisions stating that the arbitrator has the discretion to award fees to the prevailing party, as well as to reduce the amount of the award to avoid financial hardship.

Another alternative is to provide the arbitrator with discretion to assess fees against any party that raises a frivolous claim or defense. A provision that the arbitrator may award fees to the prevailing party consistent with applicable law does not change the parties rights under the fee shifting statutes, but it may deter unsophisticated potential claimants from bringing frivolous claims.

#4: Providing Consideration
For arbitration agreements to be enforceable, employees must receive something in exchange for signing the document. For new employees, requiring that they agree to arbitration as a precondition of employment typically is considered adequate consideration.

At this juncture, what constitutes adequate consideration for existing employees is less clear. Some courts have held that continued employment is sufficient consideration to support an agreement to arbitrate. However, until the requirements for consideration are determined with more clarity, employers should seriously consider providing some new economic benefit in exchange for the agreement to arbitrate. Ex-amples would include a one-time cash payment, participation in a bonus or benefit program or enhancements to an existing program that would not otherwise be provided in the absence of the agreement to arbitrate.

#5: Defining the Scope of the Agreement
To ensure that the agreement will be interpreted to cover discrimination claims, it should provide that the employee will arbitrate all claims, including all statutory claims arising out of the employment relationship or its termination. The agreement also should reflect the employees understanding that:

  • The agreement to arbitrate includes workplace discrimination claims under federal and state statutes.
  • Federal and state statutes provide procedures for filing claims in court.
  • By entering into the agreement, any claims arising out of employment or the termination of employment, regardless of the nature of the claim, can be resolved only by arbitration.

While an agreement should provide for the arbitration of all claims, it cannot lawfully preclude employees from filing discrimination charges with the EEOC and pursuing other statutory rights with government agencies. One way to ensure greater enforceability of your arbitration agreements is to make sure that they explicitly exempt such administrative claims. Doing so may help ameliorate the concern raised by the EEOC that employees who are required to sign arbitration agreement are substantially less likely to bring issues to the attention of the commission. The EEOC has indicated that it would consider filing class action suits to attack the use of overreaching agreements.

Employers wishing to take a more aggressive position may refrain from expressly carving administrative claims out of the agreement, and could instead rely upon a severability provision. Such a clause, which generally is advisable, provides that if a court or arbitrator deems part of the provision unenforceable, the remaining sections will remain in full force and effect.

For the most part, employers should agree to arbitrate their claims against employees. But there are exceptions. For example, employers may not want to arbitrate claims for injunctive or other equitable relief in situations where employees misappropriate confidential or proprietary information or engage in unlawful solicitation of employees or customers. Employers would be much better served pursuing these and related claims through the courts, rather than arbitration, but many arbitration agreements do not provide for this exception.

Employers should note, however, that employees may think it is unfair that claims may be pursued in court by the employer but not by the employees.

#6: Limitations On Discovery
Depending upon the employers goals, it may be advantageous to provide that the arbitrator has the authority to permit the full range of discovery available in federal court. Since employers typically have greater resources than employees, many feel they benefit from being able to take advantage of the full range of discovery.

However, so long as a reasonable opportunity is provided to conduct discovery, the company may address the following in an arbitration agreement:

  • Whether the disclosure of witnesses and documents to be used at the hearing will be mandatory.
  • The extent to which written discovery, such as interrogatories, production requests and requests for admissions may be used.
  • Guidelines for deposition practice, including the number of depositions permitted, who may be deposed and the length and location of depositions.

For employers interested in holding down litigation costs and avoiding the burdens of extensive discovery, limiting the number of depositionssubject to the arbitrators discretion to provide any additional discovery needed for a full and fair hearingis a reasonable approach.

#7: Costs and Fees of Arbitration
Arbitrators are paid by the parties involved; judges are not. Agree-ments should provide that the employer will bear the cost of the arbitrators fee, which will avoid claims that the employee is denied access to arbitration due to economic constraints. However, it seems reasonable to require both sides to bear their respective filing fees, which would occur in any court proceeding.

#8: Location
Some arbitration agreements set forth a specific location at which claims must be arbitrated. However, for agreements that apply to multiple locations, requiring plaintiffs and witnesses to travel to a distant city, such as the one in which the companys headquarters is located, is not advisable. It is likely that a reviewing court would refuse to enforce this requirement and even could consider it a factor in determining whether the agreement is so unfair that it is totally unenforceable.

A reasonable approach is to provide that the arbitration will take place at a location selected pursuant to the applicable procedures of the American Arbitration Association or another well-established arbitration firm to be utilized under the agreement.

#9: Judicial Review
Employers should consider whether they wish to provide for judicial review in the event the arbitrator makes an error of law. To ensure that there is something meaningful for a court to review, agreements should require arbitrators to put in writing not only their decisions, but the findings and conclusions upon which their decisions are based.

#10: Application, Manual Or Separate Contract
An arbitration agreement may be provided in an application, employee manual or separate contract. Obviously, applications are not a vehicle through which current employees may agree to arbitrate.

If handbooks or manuals are used, the typical disclaimer language stating that the document is not a contract should be modified to exclude arbitration provisions. In addition, employees should sign and date acknowledgments stating that they have received the handbook or manual and that they understand that the arbitration provisions set forth in the manual are binding.

While this is a reasonable precaution to combat arguments by employees that they did not intend to enter into an agreement to arbitrate, requiring employees to sign separate agreements places employers in a much stronger position to show that employees knowingly agreed to arbitrate. Individual agreements also provide an opportunity to include provisions that generally are not applicable to all employees, such as the particular consideration provided and the location for arbitration hearings.

When employers decide to require arbitration, they obviously must ensure that their agreements are properly drafted. But they also must take care to address employee relations issues. An effective communication effort explaining how both employers and employees benefit from arbitration can go a long way toward acceptance of this less legalistic approach to resolving legal disputes.

Authors note: This article should not be construed as legal advice or as pertaining to specific factual situations.

Editors note: For more information on effectively implementing an arbitration program, see Order in the Hearing! in the July issue of HR Magazine .

Jonathan Wetchler is a partner in the Philadelphia law firm of Wolf, Block, Schorr and Solis-Cohen, handling all aspects of employment counseling and litigation. He may be reached at
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