What Employers Really Need to Understand About Arbitration Agreements

Many employers view arbitration agreements as a cost-effective and time-saving method for resolving disputes with their employees. I am personally of the opinion that heading to arbitration is not “cost-effective” any more simply because of the cost of the fees associated with arbitration. I do agree that heading to arbitration maybe a “time saving” method but not more than heading to mediation. The other issue is whether or not arbitration agreements are enforceable and in fact, in recent years, the Courts have issued differing opinions on whether such agreements are enforceable. Generally speaking, the courts closely scrutinize arbitration agreements because the employee lacks equal bargaining power, particularly where an agreement to arbitrate is a condition of employment. The courts examine both procedural unconscionability (i.e., oppression or surprise to one side that arises from unequal bargaining power) and substantive unconscionability (i.e., whether the terms of the agreement are unduly harsh or one-sided). The California Supreme Court has held that an agreement to arbitrate is unenforceable only if both the procedural and substantive elements are satisfied, but that these types of unconscionability are viewed on a sliding scale. In other words, the more substantively oppressive the terms of the arbitration agreement, the less evidence of procedural unconscionability is required.

The California Supreme Court has set forth the minimum requirements for an enforceable arbitration agreement: (1) a modicum of mutuality; (2) a neutral arbitrator; (3) all costs beyond those normally incurred in litigation to be borne by the employer; (4) some discovery; (5) a written decision with some reasons for the award; (6) the same relief available as in litigation. Subsequent decisions by the California courts and the Ninth Circuit Court of Appeal have found unconscionable provisions that restrict an employee’s appeal rights to a second arbitrator and to awards exceeding $50,000, require payment of a deposit and fees for each arbitration session by the employee, and limit an employee to a one-year statute of limitations.

Employers should keep in mind the risk of invalidation if their agreement is improperly drafted. While the courts have enforced arbitration agreements where only one term is unconscionable and can be severed, they have denied enforcement where the entire agreement was permeated with objectionable provisions or the purpose of the agreement appears to be to obstruct the employee’s claims.

Given the complicated issues in this area, employers should consult with experienced employment counsel before drafting or implementing an arbitration agreement. The focus in drafting these agreements should be on changing the forum for resolution of the dispute, rather than seeking to gain a substantive advantage over the employee. Here are some general “DO’s” and “DON’Ts” that are worth noting:

* DO consider allowing the employee an opportunity to opt-out of arbitration within 30 days after being notified of the program.
* DO provide a procedure for the selection of a neutral arbitrator.
* DO specify the types of claims that are subject to the agreement.
* DO provide for some mutuality, rather than just requiring arbitration by the employee.
* DO allow for more than minimal discovery.
* DO require a written decision by the arbitrator setting forth the basis for the award.
* DO allow for some judicial review of the decision.
* DO include a severability clause in the event any provision is found unenforceable.
* DON’T bury the agreement to arbitrate in pre-printed complex forms that the employee is unlikely to read.
* DON’T limit the statute of limitations for any claims.
* DON’T limit the employee’s ability to pursue class or group claims.
* DON’T require the employee to share the cost of the arbitration fees or to incur other costs that they would not bear in ordinary litigation.
* DON’T limit the recoverable damages.
* DON’T provide for one-sided amendments or changes to the agreement by the employer.

So, having said all of the above, do I think you should keep your arbitration agreements in place? Probably, but don’t discount the opportunity to head to mediation first. I know employers who feel they are innocent of the allegations do not want to write a check, however, “do the math.” It really turns on being “cost effective.”