W of a March 21, 2001 decision handed in federal district court - PDF document

G Employment Alert May 2001 Mandatory Arbitration Clauses in Employment Agreements By Martha L. Lester, Esq. and Fadia R. Hindi, Esq. e have prepared this Alert to advise you is homosexual. In response, Circuit City filed suit W of a March 21, 2001 decision handed in federal district court seeking to compel Adams down by the United States Supreme to go to arbitration pursuant to the FAA. That Court affecting all employers. This decision court ruled that Adams could not take his job- compels judicial enforcement of written arbitration related disputes to court, but rather, he would have agreements included in all employment to go to arbitration as he had agreed to do in his agreements, except for contracts with employment application. Adams appealed and the transportation workers. This is an important case federal appellate court ruled that the FAA did not for employers. By making mandatory arbitration apply to any employment contracts, thereby provisions enforceable in employment agreements, permitting Adams to bring his suit in court. The the Supreme Court has given employers seeking to “...the Supreme Court has given avoid employment litigation a viable option. employers seeking to avoid employment litigation a viable option.” This is particularly good news for employers. In Circuit City Stores, Inc. v. Saint Clair Adams, a divided Court held that the exemption from the United States Supreme Court took the case and Federal Arbitration Act (the “FAA”), which reversed that decision, finding that Adams was exempts from its coverage “contracts of contractually bound to submit his claim to employment of seamen, railroad employees, or any arbitration. other class of workers engaged in foreign or interstate commerce,” does not exempt all In Circuit City , the Supreme Court examined employment contracts, but rather only those that carefully the language of the FAA. The FAA was involve transportation workers. drafted as a response to the traditional hostility of American courts to the enforcement of arbitration The facts of this case are as follows. In 1995, agreements. The FAA compels judicial Saint Clair Adams started working for Circuit City enforcement of a wide range of written arbitration Stores, Inc. In Adams’ signed employment agreements, with some exceptions. Specifically, application, Adams agreed to arbitrate “any and all the Supreme Court examined the exception clause . . . claims, disputes or controversies” related to his found in § 1 of the FAA, which provides that the employment. Two years later, Adams sued Circuit Act shall not apply “to contracts of employment of City in California state court alleging he resigned seamen, railroad employees, or any other class of after being repeatedly harassed at work because he workers engaged in foreign or interstate This document is published by Lowenstein Sandler PC to keep clients and friends informed about current issues. It is intended to provide general information only. Roseland, New Jersey Telephone 973.597.2500 L 65 Livingston Avenue www.lowenstein.com 07068-1791 Fax 973.597.2400

G commerce.” It noted that most federal appeals cannot take their job-related disputes to court courts concluded previously that this provision was under state antiarbitration laws. limited to certain workers in the transportation industry, or those workers “actually engaged in the As an employer, the Circuit City decision movement of goods in interstate commerce.” All concerns you. Employers are using alternate forms other employment contracts, they held, would be of dispute resolution more and more these days, covered under the FAA. The Supreme Court ranging from informal peer review to more formal agreed with those federal appellate courts and mediation and arbitration procedures involving ruled that the § 1 exemption is confined to third-party decision makers. In fact, more than transportation workers only. one of these alternatives can be combined to create a multi-step, multi-technique program used The Supreme Court pointed out that there are to sort out disputes at an early, more informal real benefits to arbitration in the employment stage, while still providing for more formalized context. According to the Court, “[a]rbitration agreements allow parties to avoid the costs of “According to the Court, “[a]rbitration litigation, a benefit that may be of particular agreements allow parties to avoid the importance in employment litigation, which often costs of litigation, a benefit that may be of involves smaller sums of money than disputes particular importance in employment concerning commercial contracts.” The Court litigation, which often involves smaller pointed out that these litigation costs are sums of money than disputes concerning compounded by difficult choice-of-law questions commercial contracts.” that often arise in employment disputes, and by the necessity of bifurcating proceedings where state law precludes arbitration of certain types of forums, such as mediation or arbitration, when employment claims but not others. The Supreme necessary. Court rejected the notion that by agreeing to arbitrate a statutory claim a party foregoes the Alternate forms of resolving employment substantive rights afforded by the statute; rather, disputes, such as arbitration, may not only be more the Court explained, the party submits only to cost efficient, but also more effective in terms of their resolution in an arbitral, rather than a realizing the goals of the parties involved. judicial forum. Arbitration cases are decided by a neutral, third party who may be an expert in the field, reducing This decision is one of many in a series of the risks inherent in jury trials. Further, unless the United States Supreme Court decisions regarding disputants have an express option to reject an arbitration agreements and the FAA. In 1984, the arbitrator’s decision, they are generally bound by Court held in Southland Corp. v. Keating that it. In arbitration, the case may be resolved more Congress intended the FAA to apply in state quickly than in the court system, and it may be courts and to preempt state antiarbitration laws to resolved with less ill will between the parties, the contrary. The Court did not overrule its which is beneficial particularly if an employment Southland decision. This means in cases where relationship will continue after the case is resolved. there is a valid agreement to arbitrate, employees

G • However, arbitration may have some the right to independent disadvantages from an employer’s perspective. For representation if the parties so example, the number of employee complaints may choose; rise due to the increased accessibility of arbitration • over litigation. Also, arbitrators may choose to a range of remedies equivalent to award some damages to an employee regardless of those available through litigation; the strength of his or her case. In addition, the • binding nature of these decisions could work sufficient judicial review to ensure against the employer in an adverse ruling. that the result is consistent with the governing laws; and Should you choose to establish a mandatory • arbitration program for employment disputes, it is a written opinion from the important to structure its provisions so that it is of arbitrator explaining his or her decision. “...in cases where there is a valid There are still some open questions, such as agreement to arbitrate, employees cannot how the Equal Opportunity Commission will react take their job-related disputes to court to the existence of enforceable arbitration under state antiarbitration laws.” provisions, whether such clauses can prevent class actions, how expansively the term “transportation a type that will be enforced. Not all arbitration workers” will be defined, and just how broad an clauses are enforceable and may be examined by a arbitration provision can be to be sufficient to court on a case-by-case basis. Essentially, courts encompass statutory claims. will look for elements of fairness to the employee and whether the clause affords employees What should you, as an employer, do? If you protection of their legal rights. Various employee have not considered the option of including and employer groups surveyed have agreed that for mandatory arbitration provisions in your arbitration to serve as a legitimate alternative for employment agreements, perhaps now is the time. the enforcement of employment laws, the following elements should be present: If you wish to discuss the benefits and potential • a neutral arbitrator who is familiar burdens of establishing such a program, please contact with the laws at issue and us. We would be pleased to work with you to understands the concerns of the implement such a program or on any other of your parties; employment-related matters. Please contact Martha L. Lester, Chair of the Employment Law Practice • a fair method of cost-sharing that Group, or Fadia R. Hindi, an Associate in the Group, ensures affordable access to the at (973) 597-2500, or you may e-mail either of them system; at mlester@ lowenstein.com and fhindi@ lowenstein.com.