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Mandatory Arbitration Takes a Hit -- but Lives

April 28, 2002
Related Topics: Miscellaneous Legal Issues, Featured Article
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Mandatory arbitration agreements, once hailed as employers’ silver bullet against many employee lawsuits, received a setback in January. In EEOC vs. Waffle House, the Equal Employment Opportunity Commission filed a discrimination claim against the restaurant chain on behalf of an employee who’d signed an arbitration agreement. The question at stake: Could the EEOC make an end run around mandatory arbitration? The Supreme Court said yes. While the ruling may seem to make arbitration agreements a moot point, Sarah Kelly, a labor and employment lawyer with the Philadelphia office of Cozen O’Connor, says employers shouldn’t give up hope. She offers an interpretation of the case, and what it means to HR.

The Waffle House ruling appears to take a step back from last year’s Circuit City ruling -- in which the Supreme Court seemed to consider arbitration agreements binding.
In Circuit City v. Adams, the employee, Adams, tried to go around his own arbitration agreement and bring his lawsuits straight to court. Circuit City said: You signed a mandatory arbitration agreement and we believe you’re required to arbitrate your claim. Ultimately the Supreme Court sided with Circuit City: Yes, he signed the arbitration agreement, and therefore he must arbitrate his claim.
What happened in the Waffle House case?
The EEOC probably chose to make this a specific test case. In EEOC v. Waffle House the employee, Eric Baker, had signed a mandatory arbitration agreement with Waffle House. He filed a discrimination charge with the EEOC, and the EEOC investigated his charge and filed a lawsuit on his behalf.
Before the Waffle House case, the majority view was that the EEOC was free to bring a claim, but it couldn’t seek relief specific to a particular individual. The EEOC took the position that it was allowed to sue the employer directly, not just for a change in the employer’s policy, but also for remedies specific to the individual employee. The Supreme Court said that the EEOC was permitted to do that.
What was the reasoning?
Because the EEOC is not a party to the arbitration agreement between the employee and employer, the EEOC is not limited in what it can do. The EEOC is authorized to sue and to obtain a full range of relief: monetary relief for the employee, reinstatement for the employee, or some other type of injunctive relief against the employer, even if the employee on whose behalf they’re suing has an arbitration agreement.
But you don’t think this case should worry employers?
The EEOC is probably going to pick and choose its cases, because it has limited resources. If the employee arbitrated and got an award, or there was a settlement, the EEOC may be less likely to spend its scarce resources pursuing a claim on behalf of that individual. But even if it does, and even if it recovers some money for that person, it’s likely that whatever it recovers would be reduced by the amount the employee had already gotten.
Even Justice Stevens, who wrote the opinion, seemed to think the decision wouldn’t be earth-shattering for employers.
In the opinion, he says: “The EEOC files suit in a small fraction of charges that employees file. In fiscal year 2000, the EEOC received 79,896 charges of employment discrimination. The EEOC found reasonable cause [cause to believe discrimination occurred] in 8,248 charges. But it only filed 291 lawsuits and intervened in 111 others. These numbers suggest the EEOC files less than 2 percent of all anti-discrimination claims in federal court.... Surely permitting the EEOC access to victim-specific relief in cases where the employee has agreed to binding arbitration but hasn’t yet brought a claim in arbitration will have a negligible effect on federal policy favoring arbitration.”
What should employers do now concerning mandatory arbitration?
They need to be cautious about the fact that the EEOC is still permitted to bring a suit even if the employee’s claim has gone to arbitration. There’s not much the employer can do to prevent the EEOC from doing that on behalf of an employee. But I think what employers have to recognize is it’s unlikely that the EEOC would bring a claim if the employee’s claim has already gone to arbitration. So if the employer thinks that its arbitration program has been effective, I don’t think there’s much reason to change the program based on the Waffle House decision.
What about employers that haven’t yet started an arbitration program?
The ruling makes [starting a program] a little less desirable. Developing and implementing an arbitration program is an expense for an employer, and it’s not going to provide the complete procedural safeguard that it may have provided before. But I don’t think the Waffle House decision is significant enough that it should prevent an employer who wants to do arbitration from doing so. Keep in mind that until 2001, the Supreme Court had not said clearly that these types of agreements would be enforceable in the employment context. So there were employers well before the Circuit City case who’d decided to take that risk and implement arbitration programs because they believed it would pay off.
In the new context, what should employers make sure to include in their arbitration agreements?
Currently most employers are including language that says that if the EEOC brings a claim on behalf of the individual, the individual agrees to forgo any relief that the EEOC obtains on the employee’s behalf. Now that’s untested. And the EEOC would be likely to challenge that, but it’s potentially [helpful to employers].
Can you require all employees to sign arbitration agreements?
You could require that all new employees sign up as part of becoming employed. The more difficult question is, “What if you have 20,000 current employees and you don’t just want to start this for your new employees?” I think the answer is going to vary from state to state. Some states might say that it’s not enough to simply say to the employee: “You must sign the arbitration agreement or else your employment may be terminated.” Some states might find that to be offensive to public policy. The EEOC would likely challenge that type of action.
On the other hand, what if the employer says: “We’re adopting a mandatory arbitration program for all our employees, and we’re offering a certain amount in return for your signing the agreement -- a $5,000 bonus or whatever -- and if you don’t sign, you’re terminated.” That’s a different situation. But I’m being very hypothetical here because it would really depend on what’s required state by state.
Any final advice?
In addition to reviewing their arbitration agreements, employers should review separation, severance, and settlement agreements.
Say you’re laying off a group of employees and offering them severance pay in return for a release [agreeing not to sue]. You want to look at the language of those agreements to ensure you’ve gained all the protection you can from the EEOC filing a lawsuit on behalf of the employee. Because what Waffle House means is the EEOC could still sue the employer on the employee’s behalf -- even though the employer may have paid the employee some money in severance to get a release.
So in all these employment agreements, employers [should include] language saying that the individual agrees that even if the EEOC brings suit on his behalf, he won’t accept the individualized relief. Because I think that’s the next domino to fall here: Attorneys representing employees will say that all those types of agreements between the employer and employee are not binding on the EEOC, and the EEOC can still bring relief even though the employee may have signed a release.

Workforce, May 2002, pp. 70-71 -- Subscribe Now!

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.

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