Developing a Mandatory Arbitration Program What’s fair

October 5, 1999
Issue: You are the HR Director for a mid-sized food-services company. Your CEO has asked you to look into the feasibility of implementing a mandatory arbitration program for your non-union employees. The CEO has heard that some courts have struck down arbitration agreements that were deemed "unfair" to employees. She wants you to find out more about the fairness issues to help determine how the company can develop a mandatory arbitration program that will likely hold up in court.

Answer: Your CEO has heard right. The enforceability of mandatory arbitration of statutorily protected employee rights—such as the right to be free of discrimination on the basis of race, color, religion, national origin, age or disability—is controversial. While most federal appeals courts have upheld agreements mandating private arbitration of employment disputes, they have usually required that such agreements protect certain employee rights.

What are the fairness considerations?
The Commission on the Future of Worker-Management Relations, commonly known as the Dunlop Commission, issued a report in January 1995 that proposed minimum standards of fairness in employment arbitration policies. Later that year, a benchmark for procedural fairness was established through the efforts of a multi-institution task composed of individuals representing management, labor, employment, civil rights organizations, private administrative agencies, government, and the American Arbitration Association (AAA).

This Due Process Protocol, which has been adopted by the AAA, examines eight areas for fairness. It doesn’t appear that compliance in all of these areas is essential to enforceability, but each will be a factor and will be considered in relation to other restrictive provisions. A policy with few or no safeguards will be difficult to defend, and the more the safeguards, the more likely your policy will be upheld. The eight safeguards are:

  • Right to counsel. The employee should have the right to representation of the employee’s own choosing.
  • Attorneys’ fees. The arbitrator should have the authority to award attorneys’ fees to prevailing employees in accordance with applicable law
  • Access to discovery. Employees should have access to all relevant information, including the opportunity to conduct pre-hearing depositions
  • Roster of arbitrators. The pool of arbitrators should be ethnically diverse and comprised of knowledgeable and independent male and female arbitrators experienced in workplace disputes.
  • Remedies. Arbitrators should have the authority to award the same relief that is available in court.
  • Written award. A written decision should summarize the issues and their resolution.
  • Arbitrator’s compensation. The parties should share the cost of the arbitrator in equitable proportions. (However, the Tenth Circuit has refused to enforce an arbitration agreement that required both parties to share the expense. Similarly, the DC Circuit takes the position that an employee who is seeking to enforce a statutory right cannot be required to pay any portion of the arbitrator’s fee).
  • Scope of review. The award should be final and binding, with a limited scope of review. The precise standard need not be spelled out. The policy only needs to state that it is to be binding to the maximum extent permitted by law.

When is an arbitration agreement unfair?
An arbitration agreement that fails to include each one of the fairness standards may still be enforceable. For example, the Third Circuit upheld an arbitration agreement that required an employee to waive her rights under a state antidiscrimination law to attorneys’ fees, discovery and punitive damages. But it is clear that courts are considering the fairness standards. Consider an arbitration agreement struck down by the Fourth Circuit for having been too one-sided, under which:

  • The employee was required to provide notice of a claim, including the nature of the claim and the specific acts that form the basis of the claim, but the employer was not required to file any responsive pleading or to notice its defenses.
  • The employee, but not the employer, was required to provide a list of all fact witnesses.
  • The employer provided a list of arbitrators from which the employee had to choose. There were no limitations on whom the employer could put on or take off the list
  • The employer could expand the scope of arbitration to any matter, whether related to the employee’s claim or not, but the employee could not raise any matter not included in the notice of claim.
  • The employer, but not the employee, could request a summary dismissal.
  • The employer, but not the employee, could record the arbitration hearing.
  • The employer, but not the employee, could bring a lawsuit to vacate or modify an award that was rendered in excess of the arbitrators’ authority.
  • The employer, but not the employee, could cancel the agreement to arbitrate with 30 days notice.

Cites: "A Due Process Protocol for Mediation and Arbitration of Statutory Disputes Arising Out of the Employment Relationship"; Great Western Mortgage Corp v. Peacock (3dCir 1997) 70 EPD 44,638, 110 F3d 222; Hooters of America, Inc v. Phillips (4thCir 1999) 75 EPD 45,822; Shankle v. B-G Maintenance Management of Colorado, Inc (10thCir 1999) 6 ADD 6-043; Cole v. Burns Int’l Security Services (DCCir 1997) 70 EPD 44,572, 105 F3d 1465.

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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.