Using Arbitration Agreements With Employees To Control Costs and Exposure

A useful tool that I do not see enough employers using is arbitration agreements with their employees.  There is no doubt that using arbitration agreements has positives and negatives, but it is one of the very few, limited ways in which an employer can force an employee to forego the rather ridiculously lengthy and expensive processes involved with defending claims for discrimination, retaliation, or the like.  As such, more employers should be using arbitration agreements to proactively address such situations.

As any employer who has dealt with an employment discrimination claim knows, they can be extremely long and they are typically slanted in favor of giving the employee numerous chances to demonstrate they may have a claim.  For example, a typical case filed with the Wisconsin Equal Rights Division (and cross-filed with the federal EEOC) may take 12 months to investigate and get an initial determination.  Even if a favorable decision for the employer is rendered by the ERD investigator, the employee may appeal that decision and obtain a “re-do” hearing before an Administrative Law Judge.  If the employee prevails at that hearing, they are entitled to another evidentiary hearing on the merits.  Each one of these processes can take an additional 6-9 months or more.  And, when there is a final decision in some form or fashion, either party can appeal to the Labor and Industry Review Commission and then up through the Wisconsin court system.  Unfortunately, despite Wisconsin legislation being proposed that would have given employers some tools to deal with meritless claims, those legislative changes did not become law.  Thus, employers have few tools before the ERD to get rid of a questionable claim – there is no summary judgment procedure, no offer of judgment tools, no realistic cost-shifting tools and cases will typically not be dismissed unless there is a complete dearth of evidence.

Then, at the end of this potentially years-long process, the federal EEOC may conduct their own investigation to determine if there was any violation of federal law and will almost always issue the employee a right to sue letter for federal court.  If the employee files a federal lawsuit, this additional process can then take several more years.

Of course, a majority of employment claims which are filed are successfully squashed early on by defense counsel and the employee disappears into the background after deciding not to devote additional resources to their claim.  However, even having just 1 or 2 cases per year where the employee intends to take the case to the bitter end can lead to substantial and significant defense fees and liability exposure for the employer.  And, as mentioned above, after the claim has been filed there is little the employer can do – short of attempting to settle the case – to avoid most of the defense costs and exposure.  However, utilizing arbitration agreements with employees can be a very useful, proactive tool to control such costs and risks.  And this does not even include the benefit of avoiding potential class-action employment lawsuits through these arbitration agreements.

While the purpose of this post is not to cover every aspect of arbitration agreements with employees, a few tips are warranted.  Generally speaking, because it is a contract between two parties to resolve disputes, an arbitration agreement can include many different provisions, so long as the law of contracts is followed.  But, to ensure the agreement is likely to be enforceable, employers should consider the following:

  1. Use a standalone document, do not bury your arbitration agreement in a handbook or other lengthy document. This makes it much easier to prove that the agreement was knowing and voluntary.
  2. Make the agreement to arbitrate mutual so as to further bolster the enforceability of the agreement. Yes, this means your employee can force you to arbitrate claims you bring against your employee, but given this is much less likely to happen than an employee suing the company, the benefits outweigh the risks in most situations.
  3. Do not include provisions that a court will view with disfavor. The point in the arbitration agreement is not to get away with whatever you can, the point is to provide for a binding alternative form of resolving disputes.  Requiring that the arbitration be subject to the laws of Alaska and take place in the North Pole, while it may dissuade some from pursuing claims, is likely to undermine the validity of the agreement in terms of unequal bargaining power and unconscionability.
  4. The employer should foot nearly the entire bill of the arbitration except for top-level executive employees who are highly compensated. Most courts refuse to enforce arbitration provisions where it will cost an employee making $9/hour tens of thousands to pursue a claim in arbitration.  Even with taking on this obligation, the employer is very likely to realize a substantial cost savings over the alternatives.
  5. Include a class-action waiver and a severability clause to attempt to protect against such claims. This is especially true in light of the recent decision by the U.S. Supreme Court in Epic Systems Corp. v. Lewis upholding the validity of such provisions.
  6. Include a clause that permits the arbitrator, as opposed to the court, to determine whether the claims are arbitrable or not. Arbitrators will tend to lean towards finding arbitrability, unsurprisingly.
  7. Consider including a clause that permits the employee to opt-out of the arbitration agreement within a certain amount of time (30 days perhaps) after signing. This can be strong evidence of a voluntary and knowing agreement and, in practice, no employees are likely to utilize it.
  8. Set forth the rules governing how to select the arbitrator, what rules will apply, and the like, in the arbitration agreement so it is clear and unmistakable what is being agreed to.

Employers should be using arbitration agreements more often as a useful tool to reduce the ever-escalating costs of defending against employment claims.  Employers should most certainly consult legal counsel to ensure any arbitration agreement they are requiring their employees to enter into is enforceable and valid as there are numerous pitfalls associated with the same.

If you have any questions regarding this article, please contact an attorney at Mallery & Zimmerman.