Considerations for Instituting a Mandatory Arbitration Clause

Legal Corner logoThe Federal Arbitration Act (“FAA”) was enacted by Congress in 1925 as a means to ensure that otherwise valid arbitration agreements were enforced by the courts.

At the time, courts were fairly hostile to the idea of relinquishing their jurisdiction over legal disputes brought before them. Over time, however, the notion of judicial economy, the resource strain on the court system, and several recent landmark Supreme Court decisions have created and/or bolstered a strong policy in support of arbitration.

Benefits of Arbitrationarbitration-word-and-gavel-for-settlement-or-decision

For employers, this presumption in favor of arbitration can result in a number of benefits.

Recent Supreme Court decisions analyzing the FAA have laid the groundwork for arbitration clauses that can waive an employee’s right to private employment class actions, including class actions for employment discrimination and wage-and-hour violations.

Alone, this can result in a significant reduction in risk to an employer. Not only is there a reduced risk of an enormous and irrational jury verdict, but such waiver also imposes a practical bar on litigation/arbitration.

Most employees, quite simply, will not have an individual claim sufficient, in terms of potential recoverable damages, to support this pursuit . Finally, the ability to waive class actions may, depending on an employer’s policy, result in considerable reduction in their business insurance premiums.

Beyond the waiver of the right to class actions, there are a number of general benefits to arbitration.

  • Arbitration is a confidential forum, and employers can better control (and, in Stewart-Patterson-arbitrator-and-mediatoreffect, eliminate) the publicity of the proceedings.
  • It is typically lower in cost than litigation, due predominantly to a more streamlined and condensed dispute resolution system and the arbitrator or arbitration clause’s imposition of tight discovery limitations.

What can employer can do to ensure that their arbitration clause is valid and enforceable?

First and foremost, the law of the jurisdiction where suit is filed will typically govern the enforceability of the employment contract. Therefore, it is important for multi-state employers to draft an arbitration agreement that can pass muster nationwide—or, at the very least, in the states in which the employer predominantly works.

milwaukee-arbitrationThe fundamental principles concerning the enforceability of arbitration clauses essentially amount to the employer must provide the employee a minimal level of due process, and the binding arbitration clause be fair and neutral to the employee.

To that end, the arbitration clause should:

(1) provide for neutral arbitrators

(2) provide for more than minimal discovery

(3) require the arbitrator to issue a written award

(4) provide for all of the types of relief that would otherwise be available in court

(5) not require the employees to pay unreasonable costs or any arbitrators’ fees or expenses as a condition of arbitration

Another area of concern is that there must be adequate consideration for the employee’s waiver of the right to trial or class action.

Consideration is a legal element of a contract, and it requires that there be a bargained-for exchange of value. For example, some employers have offered small bonuses or promotions to employees in exchange for entering into a binding arbitration agreements. However, a safer course would be for the employer to also bind themselves to mandatory arbitration. The binding arbitration agreement must be mutual between the employer and the employee. It is worth noting that in certain states, such as California, mutuality is a requirement to the enforceability of an arbitration clause.

In addition to general issues of enforceability, the waiver of an employee’s right to class actions has its own subset of requirements. In order to effectively waive class actions, the arbitration clause should clearly, conspicuously, and explicitly state that all class, collective, or other representative action claims are waived.

It is the essential that the arbitration clause not only state that such actions are prohibited from being filed in a court of law, but also that such actions may not be brought before an arbitrator. Accordingly, the arbitration clause should also prohibit the arbitrator from presiding over or deciding any class, collective, or other representative action.

Reasons for caution

arbitration2Despite all of the benefits that stem from binding arbitration agreements and the waiver of class actions, employers still have a significant reason to be cautious about relying on such clauses.

There is currently an open question as to whether class action waivers are enforceable in regards to claims brought under the Fair Labor Standards Act.

In 2013, the National Labor Relations Board (“NLRB”) issued a decision in D.R. Horton, which held that, in the employment context, an employer who requires its employees to waive their rights to class actions violates Section 7 of the National Labor Relations Act. Section 7 gives employees the right to act collectively for their mutual aid and protection.

The majority of the District and Circuit courts that have analyzed the impact of this decision have declined to agree with the NLRB. Nevertheless, the NLRB continues to entrench themselves in this position, and there is a substantial possibility that the Supreme Court may soon be required to analyze the FAA specifically in the employment context, and hopefully, find mandatory arbitration contracts enforceable.-Roger Mason and Dara Ashrafi .

 

Roger-5021 2Roger M. Mason is a shareholder with Sweeney, Mason, Wilson & Bosomworth in  Los Gatos, Calif. He has published numerous articles and has reported cases on various labor matters. For more information, visit www.smwb.com or call (408) 356-300

 

 

 

Chris_Conroy_Photography-0712. Roger MDara Ashrafi  is an Associate Attorney at Sweeney, Mason, Wilson & Bosomworth.His practice focuses on employment and labor law, corporate law, and civil litigation. For more information, visit www.smwb.com or call (408) 356-3000.

 

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