W of a March 21, 2001 decision handed in federal district court - - PDF document

Employment Alert

May 2001

Mandatory Arbitration Clauses in Employment Agreements

By Martha L. Lester, Esq. and Fadia R. Hindi, Esq.

W

e have prepared this Alert to advise you

• f a March 21, 2001 decision handed

down by the United States Supreme Court affecting all employers. This decision compels judicial enforcement of written arbitration agreements included in all employment agreements, except for contracts with transportation workers. This is an important case for employers. By making mandatory arbitration provisions enforceable in employment agreements, the Supreme Court has given employers seeking to avoid employment litigation a viable option. This is particularly good news for employers. In Circuit City Stores, Inc. v. Saint Clair Adams, a divided Court held that the exemption from the Federal Arbitration Act (the “FAA”), which exempts from its coverage “contracts

• f

employment of seamen, railroad employees, or any

• ther class of workers engaged in foreign or

interstate commerce,” does not exempt all employment contracts, but rather only those that involve transportation workers. The facts of this case are as follows. In 1995, Saint Clair Adams started working for Circuit City Stores, Inc. In Adams’ signed employment application, Adams agreed to arbitrate “any and all . . . claims, disputes or controversies” related to his

• employment. Two years later, Adams sued Circuit

City in California state court alleging he resigned after being repeatedly harassed at work because he is homosexual. In response, Circuit City filed suit in federal district court seeking to compel Adams to go to arbitration pursuant to the FAA. That court ruled that Adams could not take his job- related disputes to court, but rather, he would have to go to arbitration as he had agreed to do in his employment application. Adams appealed and the federal appellate court ruled that the FAA did not apply to any employment contracts, thereby permitting Adams to bring his suit in court. The United States Supreme Court took the case and reversed that decision, finding that Adams was contractually bound to submit his claim to arbitration. In Circuit City, the Supreme Court examined carefully the language of the FAA. The FAA was drafted as a response to the traditional hostility of American courts to the enforcement of arbitration agreements. The FAA compels judicial enforcement of a wide range of written arbitration agreements, with some exceptions. Specifically, the Supreme Court examined the exception clause found in § 1 of the FAA, which provides that the Act shall not apply “to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign

• r

interstate

“...the Supreme Court has given employers seeking to avoid employment litigation a viable option.”

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commerce.” It noted that most federal appeals courts concluded previously that this provision was limited to certain workers in the transportation industry, or those workers “actually engaged in the movement of goods in interstate commerce.” All

• ther employment contracts, they held, would be

covered under the FAA. The Supreme Court agreed with those federal appellate courts and ruled that the § 1 exemption is confined to transportation workers only. The Supreme Court pointed out that there are real benefits to arbitration in the employment

• context. According to the Court, “[a]rbitration

agreements allow parties to avoid the costs of litigation, a benefit that may be of particular importance in employment litigation, which often involves smaller sums of money than disputes concerning commercial contracts.” The Court pointed out that these litigation costs are compounded by difficult choice-of-law questions that often arise in employment disputes, and by the necessity of bifurcating proceedings where state law precludes arbitration of certain types of employment claims but not others. The Supreme Court rejected the notion that by agreeing to arbitrate a statutory claim a party foregoes the substantive rights afforded by the statute; rather, the Court explained, the party submits only to their resolution in an arbitral, rather than a judicial forum. This decision is one of many in a series of United States Supreme Court decisions regarding arbitration agreements and the FAA. In 1984, the Court held in Southland Corp. v. Keating that Congress intended the FAA to apply in state courts and to preempt state antiarbitration laws to the contrary. The Court did not overrule its Southland decision. This means in cases where there is a valid agreement to arbitrate, employees cannot take their job-related disputes to court under state antiarbitration laws. As an employer, the Circuit City decision concerns you. Employers are using alternate forms

• f dispute resolution more and more these days,

ranging from informal peer review to more formal mediation and arbitration procedures involving third-party decision makers. In fact, more than

• ne of these alternatives can be combined to

create a multi-step, multi-technique program used to sort out disputes at an early, more informal stage, while still providing for more formalized forums, such as mediation or arbitration, when necessary. Alternate forms of resolving employment disputes, such as arbitration, may not only be more cost efficient, but also more effective in terms of realizing the goals of the parties involved. Arbitration cases are decided by a neutral, third party who may be an expert in the field, reducing the risks inherent in jury trials. Further, unless the disputants have an express option to reject an arbitrator’s decision, they are generally bound by

• it. In arbitration, the case may be resolved more

quickly than in the court system, and it may be resolved with less ill will between the parties, which is beneficial particularly if an employment relationship will continue after the case is resolved.

“According to the Court, “[a]rbitration agreements allow parties to avoid the costs of litigation, a benefit that may be of particular importance in employment litigation, which often involves smaller sums of money than disputes concerning commercial contracts.”

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However, arbitration may have some disadvantages from an employer’s perspective. For example, the number of employee complaints may rise due to the increased accessibility of arbitration

• ver litigation. Also, arbitrators may choose to

award some damages to an employee regardless of the strength of his or her case. In addition, the binding nature of these decisions could work against the employer in an adverse ruling. Should you choose to establish a mandatory arbitration program for employment disputes, it is important to structure its provisions so that it is of a type that will be enforced. Not all arbitration clauses are enforceable and may be examined by a court on a case-by-case basis. Essentially, courts will look for elements of fairness to the employee and whether the clause affords employees protection of their legal rights. Various employee and employer groups surveyed have agreed that for arbitration to serve as a legitimate alternative for the enforcement of employment laws, the following elements should be present:

• a neutral arbitrator who is familiar

with the laws at issue and understands the concerns of the parties;

• a fair method of cost-sharing that

ensures affordable access to the system;

• the

right to independent representation if the parties so choose;

• a range of remedies equivalent to

those available through litigation;

• sufficient judicial review to ensure

that the result is consistent with the governing laws; and

• a

written

• pinion

from the arbitrator explaining his or her decision. There are still some open questions, such as how the Equal Opportunity Commission will react to the existence of enforceable arbitration provisions, whether such clauses can prevent class actions, how expansively the term “transportation workers” will be defined, and just how broad an arbitration provision can be to be sufficient to encompass statutory claims. What should you, as an employer, do? If you have not considered the option of including mandatory arbitration provisions in your employment agreements, perhaps now is the time. If you wish to discuss the benefits and potential burdens of establishing such a program, please contact

• us. We would be pleased to work with you to

implement such a program or on any other of your employment-related matters. Please contact Martha

• L. Lester, Chair of the Employment Law Practice

Group, or Fadia R. Hindi, an Associate in the Group, at (973) 597-2500, or you may e-mail either of them at mlester@ lowenstein.com and fhindi@ lowenstein.com.

“...in cases where there is a valid agreement to arbitrate, employees cannot take their job-related disputes to court under state antiarbitration laws.”

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