Enforceability of And Alternatives to
Mandatory Arbitration Agreements in the Workplace
By James R. Hammerschmidt
Responding to rising litigation costs and reports of astronomical jury verdicts,
many employers have turned to arbitration, hoping to avoid litigating employment
disputes in court. Their reasoning is simple: arbitration proceedings are perceived
as less costly and less uncertain than jury trials. However, arbitration agreements
must be carefully and thoughtfully drafted. Additionally, mandatory arbitration
may not always be the right answer.
After years of uncertainty, the Supreme Court unambiguously
endorsed the validity of arbitration provisions in Circuit City Stores v.
Adams. The United States Court of Appeals for the Fourth Circuit followed
suit in Adkins v. Labor Ready, Inc. Even the federal appellate court
– one of the last holdouts – has finally decided that the Civil
Rights Act of 1991 does not preclude enforcement of mandatory arbitration of
Title VII claims. Still, many courts seem troubled by the adhesive nature of
such agreements and seize any opportunity to free employees from the perceived
constraints of arbitration.
Courts routinely invalidate agreements that give employers
unilateral control over the pool of arbitrators, require employees to give
up substantive rights (such as having the EEOC bring a claim on an employee’s
behalf), shorten limitation periods, limit the type of relief or amount of
damages provided in employment laws, require the loser to pay the arbitration
costs and expenses, require employees to bear more than a nominal cost to arbitrate
or reserve employers’ rights to unilaterally modify the agreement.
For example, in Cheek v. United Healthcare of Mid-Atlantic,
Inc., the Court of Appeals of Maryland held that an employer’s
arbitration agreement was not enforceable against the employee and let the
employee proceed to court. A summary of the employer’s arbitration
policy – found within its employee handbook – gave the employer
the right to alter, amend, modify or revoke the arbitration policy at any
time. This language meant that the employer was not really bound by the policy
and that the employer’s employment of the employee did not serve as
sufficient consideration for the agreement. Without consideration, the court
refused to force the employee to arbitrate. In a separate case, the Fourth
Circuit recently adopted the same position.
Because employees’ waiver of their statutory rights
to a judicial forum is so important, courts also look critically at whether
employees have been given adequate notice of mandatory arbitration. Recently,
a court refused an employer’s request to stay litigation based on an
e-mail notification to all its employees referencing implementation of its
dispute resolution policy. The text of the e-mail summarized and referenced
the policy and contained links to the full policy and the company handbook.
However, the e-mail did not mention key policy provisions, such as those taking
away the right to trial. And the company could not verify that the employee
opened the links or read the policy. The court held that sending a mass e-mail
without more fails to constitute the minimum level of notice.
These judicial trends impact the way employers must draft
and implement arbitration agreements. Any arbitration agreement must be a clear
and unambiguous waiver of employees’ rights – and it must be in
writing. It must also be a separate, stand-alone document signed by employees.
Do not include or reference arbitration policies as part of an employee handbook
or policy manuals. Handbooks are typically littered (and for good reason) with
disclaimers that they are not binding contracts. Also, do not rely on e-mail
An arbitration agreement must also be carefully crafted,
not overreaching. An employer does not want to find after the fact that its
arbitration agreement is unenforceable, permitting its employees to pursue
their claims in court. Importantly, an arbitration agreement should not require
cost-splitting, include loser-pays provisions, limit remedies, force employees
to travel to a distant local or cut procedural corners.
An alternative to mandatory arbitration that has been gaining
some ground is the jury trial waiver. While largely untested in the courts,
a jury trial waiver is no different than proceeding before an arbitrator, in
which there is no jury. Yet, it offers all the trappings of the judicial process
(which is better than arbitration for employees) and offers employers the opportunity
for summary judgment proceedings, to avoid runaway juries and to appeal.
Employers should also consider whether or not to require
arbitration at all. Because it is perceived as less costly, mandatory arbitration
may lead to an increase in claims and make it more difficult to get rid of
frivolous claims. Employers who have faced few or no claims, have good human
resource policies and practices, are located in an employer-friendly jurisdiction
and who can afford the cost of litigation may do better in court. Employers
should not blindly assume arbitration is the answer or implement arbitration
policies without careful consideration.
James R. Hammerschmidt is a principal with the law firm of Paley, Rothman,
Goldstein, Rosenberg, Eig & Cooper, Chartered, in Bethesda, Maryland. He
concentrates his practice in employment law and commercial litigation.