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Mandatory Binding Arbitration—Ensure Your Plan Is Usable

June 1, 1997
Many HR professionals are looking to alternative dispute resolution (ADR) as a means of avoiding costly, lengthy employment litigation cases. However, the enforceability of mandatory binding arbitration, generally the final step in a company's ADR process, is itself under fierce litigation in both state and federal courts. Proponents know such provisions ward off runaway legal expenses. But opponents believe the provisions force employees to sacrifice their civil liberties. It's a relatively new area of law, which means the debate is far from over.

David W. Tyra, partner with Sacramento, California, law firm Weintraub Genshlea & Sproul and chairman of the firm's labor and employment law practice group, explains the best use of arbitration-and offers advice on how to make your provisions more legally defensible.

Can you explain the basics of mandatory binding arbitration?
Mandatory binding arbitration is a process by which employers and employees agree to resolve workplace disputes in an arbitration forum rather than taking those matters to court. The process arises by nature of an agreement: The employer and employee [agree] they will submit their claims to binding arbitration rather than going to court. Then the arbitration process itself can take any number of forms. There can be a single arbitrator for the arbitration; there can be a panel of three arbitrators. A number of the arbitration groups, such as the American Arbitration Association (AAA) and Judicial Arbitration and Mediation Services (JAMS), have developed protocols for arbitrating employment disputes. But the basic point is it's an agreement by which the employer and employee agree to resolve any workplace disputes through arbitration rather than in court.

Is an arbitration agreement something an employee should sign at the time of hire?
It's preferable if the arbitration agreement is something that arises at the time of employment, that the arbitration agreement is contained either in an offer letter or is executed at the time of the commencement of employment. (See "Blow the Whistle on Employment Disputes" in the May 1997 issue of Workforce to read more about arbitration in the context of employment contracts and alternative dispute resolution.) More problematic is the situation regarding how to get an arbitration process under way with the existing workforce. The most preferable situation is to have a written arbitration agreement that all employees sign that's supported by independent consideration.

What's independent consideration?
Employers can bring up the issue of entering into an arbitration agreement with the employees at the time some workplace benefit is under consideration, such as exercising a stock option, granting a discretionary merit bonus or merit pay increase. Then that increased employee benefit can serve as independent consideration for the arbitrary agreement.

What about just including the arbitration agreement in the employee handbook?
If it's impractical for the employer to enter into individual employment agreements, there's some authority for the proposition that if an employer includes an arbitration provision in the employee handbook and the employees acknowledge agreement with and their willingness to comply with all the policies contained in the employee handbook, that may suffice to establish an arbitrary agreement between employer and employee. There was a 9th Circuit decision, Nghiem v. NEC Electronics, in which the 9th Circuit held that an arbitration provision in an employee handbook, which the employee had signed acknowledgment of and willingness to comply with, was sufficient to compel binding arbitration of a workplace dispute. But I think the question is still unresolved across the country in terms of the nature of the agreement that must exist before arbitration can be compelled.

Why is mandatory arbitration creating such a fervor in the courts?
There are any number of challenges going on across the country to [arbitration] provisions in the employment setting. There are a couple of reasons why they're being so fiercely litigated. One is, and I like to think this is the primary reason, general unfamiliarity with the arbitration forum as a means for resolving disputes. People, lawyers in particular, are familiar with courts and how they operate. But few lawyers are well-versed in the parameters of arbitration, the procedures which apply to it and the benefits of it.

What's the other reason?
I suppose a more cynical view of why arbitration provisions are being hotly litigated is the fact that one of the chief benefits to employers of arbitration provisions is more reasonable, predictable results in employment litigation and avoiding runaway jury verdicts. Obviously for plaintiff's lawyers, runaway jury verdicts are a good thing because they're bigger—and in a contingency case that's the source of a plaintiff's lawyer's income. That's the more cynical view. I like to think that's not what's really driving it.

Do courts seem to be ruling a certain way as the litigation on mandatory arbitration continues?
The trend is definitely toward enforcing and upholding arbitration provisions in the courts. The trend really started in '91 with a Supreme Court decision called Gilmer v. Interstate/Johnson Lane Corp. The U.S. Supreme Court held that a provision compelling arbitration of an age-discrimination claim was enforceable under the Federal Arbitration Act (FAA) and didn't circumvent the provision of the Age Discrimination in Employment Act (ADEA). So the Supreme Court upheld, against myriad challenges, the enforceability of the arbitration provision. Since then, the trend in the federal circuit courts and the district courts has been clearly to enforce arbitration provisions. To date, the majority of them have ruled that arbitration provisions are enforceable even as applied to statutory rights cases, and a number of states have also so held.

What do opponents say about these provisions?
The opponents' argument is that there's a deprivation of constitutional rights. I don't agree with that argument because in an appropriate arbitration agreement, one that's most likely to be enforced by courts, there's no waiver of any substantive rights by the employee. For instance, I don't believe it's appropriate in an arbitration agreement—and I believe an employer would have a great deal of difficulty getting it enforced—if the employer were to include such things as a waiver of punitive damages or a foreshortened statute of limitations. In fact in the various protocols I mentioned, JAMS and AAA, those groups indicated that they'd not agree to hear arbitration of employment disputes if employers were to try to impose waivers of substantive rights on employees.

So we're not talking about employees giving up basic rights?
We're not talking about employees giving up anything. What we're talking about is creating a forum by which workplace disputes can be resolved faster, less expensively and in a more predictable fashion, which I think benefits not only employers but employees as well. So I don't buy the argument that there's some waiver of rights by employees when they enter into employment agreements. In Gilmer, the Supreme Court considered [several] challenges to arbitration agreements: that arbitration would be more biased toward employers and that arbitration agreements have an inherently unequal bargaining position between employers and employees, so mandatory arbitration agreements constitute contracts of adhesion. The U.S. Supreme Court struck down all those arguments, rejected them all, saying there was nothing to support them.

What do you mean when you say arbitration offers more predictability?
Jury trials are resolved by 12 jurors who can be swayed by their emotional reactions to things, so results can be less predictable. That's not going to be the case in arbitration. In arbitration, you're going to have either a single arbitrator or a panel of arbitrators. [Arbitrators] are trained professionals who have a great deal of experience in hearing these kinds of cases and resolving them—and who are far less disposed to impassioned responses to cases than a jury might be. So you're going to get a much more predictable result within a more limited set of parameters than you potentially would in a jury trial.

What endangers an agreement's enforceability?
One of the dangers an employer can fall into is attempting to overreach in the agreement by compelling the employee to waive rights such as recovery of punitive damage or recovery of attorneys' fees. Essentially what we're talking about in terms of arbitration agreements is simply selecting a different forum-arbitration -[instead of] the court for resolving these disputes. It's not a situation in which an employer should be compelling the employee to give up substantive rights.

Any other threats to enforceability?
Another problem, which is really somewhat unresolved, is the nature of the agreement and the independent consideration that goes along with it to make it enforceable. In other words, does there need to be a separate agreement supported by consideration? Or can an amendment of an employee handbook to include an arbitration provision—and then the signed acknowledgment of receipt by an employee—be sufficient to compel arbitration? The 9th Circuit Court ruled that's enough, but I think that's a somewhat unresolved question as to just what formality the agreement must take and how much, if any, independent consideration there must be to support its enforceability. Those are the two big enforcement issues that still loom: Overreaching by the employer to compel waiver of substantive rights as part of the arbitration agreement, and the formalities and consideration for its enforcement.

How does the Federal Arbitration Act affect arbitration agreements?
There's a specific exclusion in the FAA for contracts of employment of seamen, railroad employees or any other class of workers engaged in foreign or interstate commerce. There's been a great deal of controversy and litigation over just what that written employment contract exclusion means. The trend in the court is to narrowly interpret [certain sections] to limit the exclusion to employees engaged in the transportation industry. So [for example] arbitration agreements with airline pilots aren't enforceable under the FAA. That trend has been followed by at least four circuits now. Most states will have parallel provisions to the FAA, but the FAA has preemptive effect over contrary state law.

What's the EEOC's stance on mandatory arbitration?
Both the Equal Employment Opportunity Commission (EEOC) and the National Labor Relations Board have taken positions against the use of mandatory binding arbitration provisions in employment matters. The EEOC has been particularly aggressive about it. There's an official EEOC policy that takes a position contrary to the use of arbitration provisions.

So do the advantages of mandatory arbitration outweigh the risks?
I think there are a great many advantages to an employer in using mandatory binding arbitration provisions to resolve employment disputes. [There's] more predictability in results, which reduces the employer's emotional distress and punitive damage claims because an arbitrator is much less likely to be swayed by emotions and impose large punitive damage awards. Arbitration tends to be faster; you get to resolution more quickly. It also tends to be less costly because of reduced pretrial discovery and motion procedures. Arbitrations are also private, so there's a certain confidentiality benefit because they aren't conducted in a public court.

What are the disadvantages?
The disadvantages aren't necessarily in the use of arbitration provisions by employers but in the way that arbitration agreements are addressed with employees in sometimes a heavy-handed fashion. Employers can run into real trouble in terms of workplace morale if they attempt these provisions in a heavy-handed, sign-it-or-leave manner. Employers ought to take time to think about the way this is going to be presented to employees. Presenting arbitration agreements to employees at a time when additional job benefits are being considered is really a positive way to do it because then the arbitration agreement is tied into a reward to the employee as well. There will tend to be less hard feelings. The other disadvantage [applies to] employers who have overreaching contracts. They may have a real difficult time having those provisions enforced by the court, and they'll have lost the benefit of arbitration by being greedy and attempting to overreach.

What are the must-haves of a good agreement?
Simply put, the arbitration agreement is an agreement between the employer and employee to use a different forum for resolving their disputes. So an arbitration agreement should be broad in the description of disputes that are subject to it: all disputes arising out of the employment relationship. It should be broad in its reach in terms of the employees brought within it, to include not only supervisors but rank-and-file employees as well.

Workforce, June 1997, Vol. 76, No. 6, pp. 121-127.