Over the past six months or so, there has been much discussion within the employment law community about workplace arbitration arrangements, and in particular, about recent case law generally upholding contractual requirements that arbitration proceed on an individual basis and not on a class or collective basis. Given the rising tide of class actions (e.g., discrimination claims, state wage-and-hour claims) and collective actions (e.g., claims for overtime under the Fair Labor Standards Act, age discrimination claims under federal law) being filed against businesses, employers are beginning to reexamine whether arbitration makes sense for them. And for those employers who have existing arbitration arrangements, they are examining whether and how they can add to or improve on their arrangements.
This Client Alert begins by briefly addressing the recent developments affecting class and collective action waivers in arbitration arrangements. It then goes on to discuss other issues that employers should focus on when considering (or reconsidering) the value and enforceability of their workplace arbitration arrangements.
Enforceability of Class and Collective Action Waivers in Arbitration
This past summer, in American Express Co. v. Italian Colors Restaurant, the U.S. Supreme Court held that an arbitration provision containing a class action waiver is enforceable even where the cost of pursuing the claim on an individual basis is not economically feasible because the costs of proving the individual claim exceed the potential recovery. While this case did not involve the employer-employee relationship (it was an antitrust claim brought by businesses against American Express), the decision contains favorable language for employers, language that multiple courts, including the Second Circuit Court of Appeals, are now citing to enforce class and collective action waivers against employees.
At the same time, the National Labor Relations Board (NLRB) has been attacking the enforceability of class and collective action waivers on the ground that such waivers violate employees' "Section 7 rights" under the National Labor Relations Act ("Section 7 rights" allow employees to engage in "concerted activities" for their "mutual aid and protection"). The NLRB first set forth its position in its January 2012 decision in the D.R. Horton matter. However, the NLRB's D.R. Horton decision was recently reversed by the Fifth Circuit Court of Appeals (in December 2013) and no other Court of Appeals has followed the NLRB's D.R. Horton decision. Nonetheless, the NLRB has continued to maintain its position that class and collective action waivers are unenforceable. It is likely that the NLRB will continue to maintain this position until a sufficient number of Courts of Appeals follow the Fifth Circuit's decision or the U.S. Supreme Court overturns the NLRB.
As a result of these recent developments, employers should feel more comfortable including class and collective action waivers in their arbitration arrangements. Such waivers will not only reduce the risks and costs associated with employment class and collective actions, but are also likely to result in a reduction in the number of significant claims filed against employers, as it may not be economically feasible for employees to pursue certain claims on an individual basis.
Considerations for Employers and Their Workplace Arbitration Arrangements
There are a number of reasons why employers may find it beneficial to bind their employees to arbitration, besides the prospect of greatly limiting employee class and collective actions that could be initiated against them by current and former employees (note, however, that government agencies, who are not parties to the arbitration arrangement, would still be free to litigate claims in court). Other advantages of arbitration, as compared to litigation in court, can include lower costs, a confidential setting with more privacy, a speedier resolution, and a more efficient and flexible process likely to result in a lesser time commitment for the employer's key personnel and its counsel. Appeal costs are also generally lower, as judicial review of arbitration awards is limited (which can work for or against either party).
In order to create a workplace arbitration arrangement that is in the best position to withstand a challenge to its enforceability, there are a number of issues that employers will want to focus on, ten of the most important of which are addressed briefly below. Please note that these issues are generally matters governed by state law, so in considering how best to structure a workplace arbitration arrangement, employers must also focus on the applicable law of the state(s) in which they operate.
- Class and Collective Action Waivers Should Be Drafted Carefully. A class and collective action waiver should be explicit, clearly worded, and conspicuous. It should make clear that the arbitrator does not have the authority to hear class or collective action claims. Employers should consider whether it makes sense to include a provision alerting the employee that he or she is free to challenge (acting individually or concertedly with others) the class and collective action waiver in any forum, although the employer remains free to seek to enforce the waiver and compel arbitration on an individual basis.
- Arbitration Should Not Prevent Employees from Filing Administrative Claims. While the Fifth Circuit Court of Appeals reversed the NLRB's decision in D.R. Horton with respect to the enforceability of the class action waiver, it upheld the NLRB's decision that the employer was required to revise its arbitration provision to clarify that the provision did not eliminate employees' rights to pursue claims of unfair labor practices with the NLRB. An arbitration arrangement will violate the NLRA if it prohibits employees from filing unfair labor practice claims with the NLRB. The same likely holds true for arrangements that prohibit employees from filing claims with other government agencies. Arbitration arrangements should include a statement that a waiver of class and collective actions is not intended to limit or interfere with any rights that employees may have to file administrative claims (for example, with the NLRB, EEOC, or DOL). We also recommend specifically carving out employees' rights to file workers' compensation and unemployment insurance claims, and rights to bring claims that by law may not be subject to a pre-dispute mandatory arbitration arrangement.
- The Arbitration Arrangement Must Be Supported by Valid Consideration. In order to be an enforceable contract, an arbitration arrangement must be supported by valid consideration. In some jurisdictions, including New York, at-will employment or continued employment is generally sufficient consideration for an agreement to arbitrate. However, in some jurisdictions, additional consideration may be necessary. Arbitration arrangements often bind both the employer and the employee, and this mutual forbearance of the right to litigate in court generally can serve as valid consideration (and, in some jurisdictions, is required). Employers will want to consider what claims it may want to exclude from their arbitration obligation (e.g., claims for injunctive relief enforcing restrictive covenants, claims for benefits under employee benefit plans) and to what extent such an exclusion would weaken the enforceability of the arbitration arrangement.
- The Arbitration Arrangement Must Not Be Unconscionable. While employers may be able to use arbitration to change some of the rules that would normally apply in litigation (e.g., reduced motion practice, limited discovery), they should not do so to the point where the arrangement could be invalidated on grounds of "unconscionability." In most cases, a determination of "unconscionability" revolves around whether the arrangement's terms are grossly unreasonable or unreasonably favorable to one party. For example, if an arbitration arrangement requires employees to pay unaffordable arbitration costs or arbitration costs unreasonably in excess of the costs of litigation, alters the right of the parties to collect certain types of damages, or places extreme limits on the discovery process, these factors could cause a court to invalidate an arbitration arrangement on the grounds of unconscionability. While beyond the scope of this Client Alert, in light of recent U.S. Supreme Court decisions, some requirements imposed by states on arbitration arrangements in order to avoid a finding of unconscionability are being struck down as preempted by the Federal Arbitration Act.
One point that is clear is that employers should carefully consider what portion of the arbitration's costs employees will be required to bear. Multiple U.S. Supreme Court decisions caution that an arbitration arrangement could be invalidated under the "effective vindication" doctrine if filing and administrative fees attached to arbitration are so high as to make arbitrating impracticable.
- Consider What Fairness Safeguards Are Needed. Some jurisdictions, such as California, require that certain "fairness" safeguards be contained in an arbitration arrangement before certain statutory rights can be waived. For example, state law may require that the arbitration arrangement provide for the selection of a neutral arbitrator, a written arbitral award, and the availability of all of the types of relief that would otherwise be available in court. As noted above, there is an open question as to whether these types of state law requirements are preempted by federal law in light of recent U.S. Supreme Court decisions.
- The Arbitration Commitment Should Not Be Illusory. Employers should consider limits on their right to modify, amend, or revoke the arbitration arrangement for all claims at any time. Broadly reserving such rights could make the arrangement vulnerable to attack on the grounds that it is illusory (because only the employee is actually bound by the arrangement) and therefore unenforceable. Instead, we recommend that employers place limits on their right to modify, amend, or revoke the arrangement, such as by including a sufficient notice period that is required before implementing changes to the arrangement and/or a prohibition on retroactive changes that apply to claims that have already accrued.
- Consider Whether and How Employees Expressly Agree to the Arbitration Arrangement. Arbitration arrangements can take many forms. For the greatest likelihood of enforceability in all jurisdictions, a written agreement addressing the arbitration arrangement should be signed by both parties. This can be done within an individual agreement (such as an employment agreement or a counter-signed offer letter) or via a stand-alone policy. However, a written signature is not always required to create a binding contract. While some jurisdictions, such as New York, will enforce an arbitration provision set forth in an employee handbook even if the employee has not signed an acknowledgement of receipt and/or agreement, we do not recommend that such provisions be contained in employee handbooks (because employee handbooks generally contain language that would undermine the argument that the arbitration arrangement is a binding and mutual contract between the parties).
Employers should consider how to obtain each employee's agreement to the arbitration arrangement. In some cases, a written signature from every employee is not always feasible. Other considerations may dictate against such an approach. In those cases, some employers distribute an arbitration policy and simply put employees on notice of it, relying on an employee's employment or continued employment after receipt of such notice as his or her agreement to be bound by the policy (such practices are generally enforceable in New York). Other employers distribute an arbitration policy with an "opt-out" provision, offering employees a procedure by which they can affirmatively opt out of the arbitration arrangement within a certain period of time, or else be bound by it. Each of these approaches has its pros and cons, and one approach that may work well for one employer may not work well for another.
- Consider Using Arbitration to Shorten Statutes of Limitations. For some claims, parties may agree to shorten the otherwise applicable statute of limitations period by contract, provided that the shortened period is reasonable. In examining reasonableness, courts have historically looked at factors such as unequal bargaining power, whether the shortened statutory period would preclude recovery under law, and whether or not there is or can be mutuality. However, some states, such as Florida, have passed statutes explicitly voiding any contract provision attempting to shorten an applicable statute of limitations, and courts in other jurisdictions, such as California, have held that shortened limitations periods in arbitration provisions are unconscionable. In the recent Heimeshoff v. Hartford Insurance case, the U.S. Supreme Court held that, absent a controlling statute to the contrary, ERISA does not prohibit employee benefit plans from shortening the otherwise applicable statute of limitations, provided that the shortened statute of limitations period is reasonable. This holding may ultimately have implications for employers beyond the ERISA context.
- The Arbitration Arrangement Should Seek to Resolve Disputes Efficiently. Since arbitration is in many ways simply a matter of contract between parties, employers should think of creative approaches to making arbitration a more efficient and economical dispute resolution mechanism for their workforce. For example, one arbitration provision discussed in a recent case provided that, while the employee had the right to be represented by an attorney at the arbitration, if the employee declined attorney representation, the employer agreed that it would also forego having an attorney present at the arbitration.
- Consider Including a Specific Severability Clause. We recommend including a severability clause in any arbitration arrangement, so that if a court finds that certain elements of the arrangement are unenforceable, the court is authorized to sever the offending elements and enforce the remainder of the arrangement as written. One caveat involves a finding that the class and collective action waiver is unenforceable (for example, if the NLRB's D.R. Horton decision gains traction and is upheld). Employers should consider including a provision that, in such event, the class and collective action can only proceed in court rather than arbitration (as it is generally thought that employers are in a better position to defend themselves in court against class or collective action claims).