Do your employment contracts contain arbitration agreements? If so, a recent Supreme Court decision supports the enforcement of such provisions, making it easier for employers to compel arbitration of employment-related claims. Arbitration agreements have been gaining traction since the enactment of the Federal Arbitration Act (FAA) in 1926, which compels enforcement of arbitration agreements in any “contract evidencing a transaction involving commerce.” Since then, the Supreme Court has imposed two restrictions on the FAA – arbitration agreements must be in a maritime contract or one dealing with interstate commerce, and the agreements can be revoked on public policy grounds if they “operat[e] ...as a prospective waiver of a party’s right to pursue statutory remedies.”1
Employees who enter arbitration agreements with employers engaged in interstate commerce can be bound to arbitrate all employment-related claims, including discrimination claims under state law and claims arising from the employment application process. The Supreme Court has consistently emphasized the binding nature of arbitration provisions, viewing them as a matter of contract that will be strictly enforced.
In June 2013, the Court reiterated the compulsory nature of arbitration agreements in American Express Co. v. Italian Colors Restaurant.2 American Express entered into agreements that contained a waiver of class arbitration with merchants who accept their credit card. Disregarding the waiver, several merchants joined together to sue American Express. They argued that the arbitration agreement should not be enforced because the cost of arbitrating individual claims would exceed any potential damages. Sticking to past precedent, the Court held that the FAA does not permit courts to invalidate a waiver of class arbitration, particularly on the basis of expense or inconvenience. As long as an employee is able to pursue his individual statutory claim in an arbitration setting, the FAA will “continue to serve both its remedial and deterrent function.”3
However, employers should draft and implement arbitration agreements carefully. Employees who want to undo a waiver of class arbitration may have several potential claims. A court may choose to reject the terms of a class arbitration waiver if: (1) there is evidence that there was no actual agreement, or the terms are so unfair or one-sided that they should not be enforced under state law, (2) a statute exists that guarantees the right to class proceedings for a particular claim, or (3) Congress specifically invalidates the provision. But rest assured – these are diffcult arguments to make. As the Supreme Court said in American Express, class protections are an exception, not the rule.
The bottom line for employers? Arbitration agreements can be effective strategies to resolve claims quickly and cost-effectively. The FAA mandates that arbitration agreements be “rigorously enforced” according to their terms, so having a well-drafted agreement can really pay o% in the long run. The FAA permits parties who enter arbitration agreements to include any terms they see #t. Just remember, like any contract, the terms will be construed against the drafter.
Work with your legal counsel to ensure your arbitration provisions are clear and align with your corporation’s goals before having employees sign on the dotted line. Also, encourage employees to read everything in their contract before signing. Talk through the provisions to ensure a mutual understanding, and emphasize the binding nature.
With some forethought and careful execution, arbitration agreements may be a viable alternative to resolving future employee disputes within your organization.