Winter 2011: Arbitration Agreements


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With the rise in employment-related litigation, many companies are looking for alternatives to avoid the time, expense and bias associated with court proceedings. One way is to agree with your employees that employment disputes will be heard before an arbitrator rather than in court.

In an arbitration, each party (the employer and the employee) presents their side of the dispute to an arbitrator (or panel of arbitrators) jointly selected by the parties utilizing procedures set forth in the arbitration agreement. The arbitrator then decides the merits of the case, fashions an appropriate remedy, and issues an opinion which the parties have voluntarily agreed to accept.

Sounds simple? As compared to the discovery process, motions, evidentiary issues, etc. in state and federal court, that may be true. However, because the private arbitration process cannot deny certain rights the parties would have in court, there are numerous requirements for a valid arbitration agreement.

Court cases that have considered the enforceability of arbitration agreements in the employment context have focused on whether or not such agreements are “unconscionable” and, if so, unenforceable. In order to be enforceable an arbitration agreement cannot be procedurally and substantively unconscionable. Procedural unconscionability means that there is unequal bargaining power as between the parties to the agreement. Substantive unconscionability relates to whether the terms of the agreement are unduly harsh or oppressive. To be found unenforceable the agreement must be both procedurally and substantively unconscionable. The weight of each also affects the outcome – the more procedurally unconscionable the agreement is, the less substantive unconscionability is needed to render it unenforceable and vice-versa.

Virtually all arbitration agreements in the employment context will be found procedurally unconscionable. This is because the employer generally presents the agreement on a “take it or leave it” basis to the employee. Rarely is the employee allowed to suggest changes or otherwise negotiate the terms of the agreement.

Substantive unconscionability is generally found when the agreement does not afford the employee the same rights he/she would have in a court proceeding. Court cases reviewing arbitration agreements have found substantive unconscionability (rendering the agreement unenforceable) when the agreement:

• Does not require a written opinion by the arbitrator;

• Does not allow the arbitrator to impose the same remedies as a court;

• Requires that the employees pay a share of the expenses (e.g., for the arbitrator) which an employee would not be required to pay in a civil action; or

• Does not allow for “adequate” discovery

Nonetheless, if appropriately drafted, an arbitration agreement can reduce the cost of defending the employer’s actions; resolve a dispute faster; and minimize the potential biases inherent in a jury trial.

In order to effectively implement the arbitration process to resolve employment disputes, in addition to the requirements noted above the employer must ensure that:

• The employee clearly understands that he/she is agreeing to forego a civil action and the employee’s right to a jury trial;

• The agreement is an enforceable contract (the employee has been given “consideration” or something of value) for having signed the agreement [which may be an issue if the agreement is not signed at the time of hire]; and

• The fact that the employee agrees to arbitrate harassment and discrimination claims should be specifically noted; and administrative charges with appropriate agencies should not be restricted (except for individual recovery).

For more information or assistance with the creation and effective implementation of an arbitration agreement contact Jeanne Flaherty or Lynn Ryder.