Arbitration is a commonly used form of alternative dispute resolution (ADR). While voluntary agreements to arbitration have been used in commercial disputes for many years, today’s employers are utilizing a different form of arbitration known as forced arbitration. Forced arbitration occurs when an employer conditions initial employment, continued employment, or important employment benefits on the employee’s agreement to arbitrate any future claims against the employer. While you should consult with an attorney for questions about specific arbitration provisions, the following are some frequently asked questions about arbitration.
1. What is arbitration?
Arbitration is a commonly used form of alternative dispute resolution (ADR). ADR is a process for resolving disputes outside of the public court system. Arbitration usually involves the submission of claims, which might otherwise have been brought to the public court system, for resolution by a private arbitrator. The arbitrator is paid by one or both of the parties involved in the dispute. Discovery (the ability to obtain relevant information from the other side) is generally limited. Although some arbitrators are experts in their fields, arbitrators are not required to be judges or attorneys, and are not required to know and/or follow the law that is the subject of the dispute.
2. What is forced arbitration?
Forced arbitration is arbitration that is imposed as a condition of employment or required for the receipt of a benefit related to employment. Although it is called “forced” arbitration, there is no legal requirement that any employee accept arbitration as a method of resolving claims that could otherwise be presented to the public court system. However, employers often condition valuable benefits – such as getting or keeping a job – on your “agreement” to submit claims to arbitration which otherwise could have been presented to the public court system. Usually such agreements provide that you have no right to go outside the arbitration system and present your claims to the public courts. In forced arbitration situations, your job may depend on accepting such a provision: your only other choice is to not take the job.
Is arbitration bad?
No. Voluntary arbitration has been used for years in the context of commercial disputes. Companies have employed panels of arbitrators experienced in the industry or field to settle matters quickly and relatively inexpensively when disputes arise between them.
This has also been true in the situation of organized workplaces where workers are represented by unions. Union/management arbitration is often the end of the grievance process for employees covered by a collective bargaining agreement.
In general, this process has worked well for parties to commercial disputes and union disputes in part because the arbitrators are familiar with and well versed in the business and workplace that they are asked to deal with in the arbitration proceedings. Generally, the matters before the arbitrator involve issues of interpreting the contract, and involve repeat users of the system. The parties have equal bargaining power and equal access to evidence necessary to prove their case.
However, in these types of arbitrations, arbitration is a voluntary agreement between the parties. The arbitration process is affected by the fact that the parties have agreed to arbitration and could – with some limitations – decline to participate in arbitration in the future. This distinguishes arbitration generally from “forced” arbitration, which is becoming more prevalent.
Is forced arbitration bad?
Yes. For a variety of reasons, forced arbitration is generally bad for employees. Forced arbitration deprives you of your right to access the public court system. The denial of that access – without you being able to make a meaningful voluntary choice to surrender that right – is a significant loss.
The public court system provides the protection of a system relatively free from the influence of the employer – a protection often not provided in forced arbitration. Additionally, the court system is open to public scrutiny and its decisions are subject to appeal. In employment cases, access to discovery is critical, since so much of the information you need to prove your case is in your employer’s hands. Unlike arbitration in labor or commercial disputes, instead of having a contract govern the relationship between the parties, there are laws that must be interpreted and enforced as they apply to the employment relationship, which make these cases more complex and require judges well-versed in the law. These and many other valuable features of the public court system are either limited or not available in the forced arbitration system.
Lastly, not only are there often much higher costs associated with forced arbitration than with use of the public court system, but recent evidence shows that employees who are governed by forced arbitration rarely file claims. This allows employers who violate employee protection laws to continue to do so without being held accountable for their actions.
Is arbitration legal?
Yes. The Federal Arbitration Act, or FAA, was passed in 1925 in response to a variety of court decisions that held arbitration agreements unenforceable. This law provides that arbitration agreements are generally valid and enforceable. The major exception to this provision is that the arbitration agreement is not enforceable if it violates the general law of contracts – which applies to all contracts under the law of the state that governs the agreement.
Is forced arbitration legal?
Generally, yes. The United States Supreme Court decided in 2001 that the FAA applies broadly to employment contracts. Most decisions before this limited the ability of employers to force employees to agree to arbitration provisions under the FAA. Since the US Supreme Court’s decision in 2001, the use of forced arbitration agreements by employers has increased greatly, as have the decisions enforcing such agreements against employees. However, even this general policy enforcing forced arbitration has limits.
It is important to remember that state contract law governs whether an arbitration agreement is enforceable. So while arbitration agreements are generally ok, a state’s specific contract laws may make a particular arbitration agreement unenforceable depending on the facts of that case or contract. A good example of how this works is on the issue of consideration in contract law. One important concept in contract law is that a valid contract must be based on adequate “consideration. This means that in order for a contract to be enforceable the benefit of the contract must be bargained for, in other words each party gets something of value in exchange for something else of value. In the context of arbitration, you are conferring a benefit on the employer by agreeing to arbitrate any future claims, and thus you should receive something of value in return. For instance, if an arbitration agreement is signed as part of the initial employment contract, your employment can be valid consideration – You give up your rights to potential legal action in exchange for a job. However, what constitutes valid consideration in the employment context varies from state to state. For instance, in Baker v. Bristol Care, Inc., the Supreme Court of Missouri held that an arbitration agreement lacked consideration where the agreement was based on continued employment (after the employee had already been hired). So, the Missouri court held that the employee’s continued employment was not valuable enough to constitute consideration for the benefit gained by the employer (the agreement to arbitrate) – therefore, the agreement was unenforceable for lack of consideration. Courts in a different state might have a different outcome under the same facts based on the contract law of that state.
One major exception to the general rule that forced arbitration agreements are legal also exists in the context of Federal contracting. Federal Acquisition Regulation (FAR) 22.2006, implementing Section 6 of the 2014 executive order, Fair Pay and Safe Work Places, requires that in contracts estimated to exceed $1,000,000, that are not contracts for commercial goods, the decision to arbitrate claims arising under title VII of the Civil Rights Act of 1964, or any tort related to or arising out of sexual harassment, shall only be made with the voluntary consent of employees or independent contractors after such disputes arise. This means that parties engaged in federal contracting cannot require arbitration of all potential claims as a condition of employment.
However, FAR 22.2006 does not apply to (1) Employees covered by a collective bargaining agreement negotiated between the Contractor and a labor organization representing the employees [union]; or (2) Employees or independent contractors who entered into a valid contract to arbitrate prior to the Contractor bidding on a contract containing this clause[.] Furthermore, [t]his exception does not apply: (i) If the contractor is permitted to change the terms of the contract with the employee or independent contractor; or (ii) When the contract with the employee or independent contractor is renegotiated or replaced.
What are the legal limits of forced arbitration?
The legal limits of forced arbitration are still being defined. The limits depend to a degree on the state court system in which the agreement will be tested, as well as the area of the country in which your case might be heard. Different federal circuit courts of appeal have taken very different positions on forced arbitration in general. Some courts have been skeptical of enforcing forced arbitration against unwilling employees, whereas others have embraced the practice. The issues and factors that the courts use to determine whether an “agreement” violates the limits of forced arbitration vary somewhat from state to state and from one federal court to another.
Broadly speaking, the questions that courts will ask about an arbitration agreement fall into two categories – substantive unconscionability and procedural unconscionability. Each of these are discussed in more detail below. It is unlikely that an agreement will be struck down unless a court determines that it is both substantively and procedurally unconscionable.
For example, in Arnold v. Burger King, where an employee alleged she was raped by a supervisor while at work, the Ohio State court struck down a forced arbitration agreement signed by the employee. The court held that the arbitration agreement was procedurally unconscionable given the disparity in bargaining power between the parties, and substantively unconscionable as it sought to include a claim of rape within its broad scope. Thus, the combination of procedural and substantive unconscionability rendered the agreement unenforceable.
Who gets to decide whether the agreement to arbitrate is enforceable?
It might seem obvious that the public court system would get to decide whether the agreement denying an employee access to the public court system is enforceable. However, in 2010, the Supreme Court of the United States held in Rent-a-Center, West, Inc. v. Jackson, that where an agreement to arbitrate includes a provision that the arbitrator will determine the enforceability of the agreement as a whole, if a party challenges that particular provision, then a district court may consider the enforceability of that provision, but if a party challenges the enforceability of the whole agreement, then the provision controls and the arbitrator decides whether the agreement as a whole is enforceable. Thus, effectively, you may be prevented access to the courts even to decide whether you should have access to the courts.
What is “procedural unconscionability?”
Procedural unconscionability deals with how the arbitration agreement was formed. What was the bargaining power of the parties? There are limits that courts have imposed on the manner in which the employee is made to “agree” to arbitration. Factors which courts have considered in determining whether an arbitration agreement is a procedurally unconscionable include:
- the time an employee was given to review and consider the agreement
- whether an employee was permitted to speak to a lawyer about the rights that he or she was giving up by agreeing to such a provision,
- whether the employer threatened the employee with the loss of his or her job or another important employment benefit if he or she did not accept the arbitration provision,
- whether an employee was told that the agreement was termed ‘just a form,’ or ‘not important,’ and/or that it was not necessary to read the agreement before signing it,
- whether the agreement was snuck into fine print inconspicuously located at the bottom of documents or on the back side of documents.
What is substantive unconscionability?
Substantive unconscionability looks at the fairness of the process under the agreement versus what an employee would otherwise have in the public court system. Does the arbitration provision eliminate some claims that could have been made in a court such as a claim for a penalty which might be available under the law for late payment of wages? Or, do the arbitration proision eliminate remedies which might otherwise be available? These and other similar issues are a limitation on the employee’s substantive rights and may be substantively unconscionable.
In 2013, the Supreme Court of the United States noted in American Express Co. Et. Al. v. Italian Colors Restaurant et al., that the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy. Thus, the waiver of class arbitration was upheld even where the cost of arbitrating an individual claim exceeded the potential recovery. Employers will likely rely on this to support their incorporation of waivers of class action claims within employee arbitration agreements.
Nonetheless, in 2014 the National Labor Relations Board held in Murphy Oil that a forced arbitration agreement in which employees waived their right to participate in collective legal claims constituted an unfair labor practice on the part of the employer and was thus unenforceable. It is important to note that when cases are heard by an NLRB judge, the losing party has the right to appeal the decision for review by the full five-member board, and finally may appeal the decision to a federal court. So it is important to remember that a decision at the NLRB level, whether positive or negative, may not survive the appeals process. Federal courts have varied by jurisdiction on their decisions to enforce forced arbitration agreements.
Factors courts often look to in determining whether an agreement is a substantively unconscionable include:
- the cost of arbitration to the employee,
- limitations on the relief the employee can get in arbitration versus public court,
- mutuality – that is, whether the employer and employee are both bound to arbitrate their claims,
- limits on methods used to get evidence which would otherwise be available in a public court to the employee,
- justifications for one-sided results,
- overall imbalance in the obligations imposed.
What costs are too high to be enforced?
Imposing high costs on an employee who wishes to enforce his or her rights under the law may, depending on the circumstances, render an arbitration agreement unenforceable. It is important for an employee to realize that these costs are at times not obvious. Arbitrators may require a very high fee even for getting involved in the case – sometimes thousands of dollars – in addition to charging an hourly rate for their services. Proof of the costs of arbitration is sometimes hard to come by and is sometimes required by courts to use this ground as a basis to strike down an agreement. No fixed dollar amount is set in law as too high to force an employee to pay.
All that can be fairly said in general is that the higher the cost imposed on the employee to engage in arbitration the greater the likelihood that the court will strike the arbitration provision down as unenforceable. The trend is moving in the direction of not enforcing agreements that require employees to incur any costs that are higher than the employee would otherwise have to pay in court.
What is the standard for arbitrator bias?
An area of unconscionability which courts are very sensitive to in general is any biased method of selecting the arbitrator. For instance, if the employer maintains complete control over selection of the arbitrator, most courts have found the agreement unenforceable. Unfortunately, this is a situation that is still somewhat difficult to discover, as employers often use what appear to be neutral or independent agencies to supply arbitrators. However, in many situations, these agencies actually advertise their services exclusively to employers and emphasize that they are a means of controlling the cost of employee claims. Also, there are times when arbitrators do regular business with an employer and depend upon the income from that employer’s business. All of these are factors that can influence a court in deciding whether an arbitration “agreement” is unenforceable because it does not protect the employee’s right to a neutral party as an arbitrator.
What limitations on relief are too much?
Generally, courts have looked very critically at any limitation on the relief that, absent the arbitration agreement, would otherwise be available in public court.. As a result, most forced arbitration agreements now specifically provide that there is no limitation on the claims or damages that the employee can receive. Any restriction on remedies that the employee would have had available in court greatly increases the chance that the agreement will be struck down as unenforceable by the courts.
For example, in Iskanian v. CLS Transportation Los Angeles LLC, the California Supreme Court said that while forced arbitration agreements class action waivers are generally enforceable, a PAGA (Private Attorneys General Act) claim is unwaiveable. It is important to look to the law of the state that governs your employment contract to see if there are unique claims available to you as an employee.
Is a mutual agreement required?
Courts vary in requiring “mutuality” of agreement to submit claims to arbitration. That is, some courts require, as a condition of enforcement, that the employer agree to submit any clams it has against the employee to arbitration as well as requiring the employee to do so with claims against the employer. The idea that a contract must have reciprocal promises and not be completely one-sided is basic to contract law. However, not all courts enforce this rule in the arbitration area, as many have said there is no “mutuality” requirement for arbitration agreements.
What procedural limitations are too restrictive?
Many discrimination claims and other employment claims are difficult if not impossible to prove without getting information from the employer. This can include information about you – the wronged employee – and about other employees. It may include information about employer policies, investigations, pay and benefits. In public court systems such information is usually available through a process known as discovery. The availability of discovery is often very limited in arbitration proceedings. This is a major disadvantage to arbitration for many employees. Courts are becoming more sensitive to limitations on discovery, and are becoming more likely to strike down discovery limitations, such as those that prohibit depositions.
After working at my company for several years, I’ve been asked to sign a forced arbitration agreement at work. What should I do?
You have a difficult decision to make, although it may not matter whether you sign the “agreement” or not. If you continue to work after you are informed that a forced arbitration agreement governs your employment, you may be bound by it, even if you refuse to sign it. If you quit – or if you are fired for refusing to sign the “agreement”- you may not have any grounds to sue. This depends on the facts of your job, how the “agreement” is presented, and the court jurisdiction that controls your situation. If you do sign it, you will probably be stuck with arbitration as the only method of legal redress for any job-related problems.
Here are some potential responses that may help better protect you in this situation:
- Ask your employer whether you have a choice to sign the agreement.
- Have it reviewed by legal counsel to determine whether it’s enforceable in your jurisdiction.
- Make careful notes of any conversations you have with your employer about modifying or not signing the agreement.
- Let your employer know, and document, that you are concerned about the additional costs of arbitration.
If there is a way, without jeopardizing your employment, to indicate that you’re only signing the document to keep your job, rather than voluntarily consenting to arbitration, then do so. However, you must carefully balance your interest in challenging the policy with your interest in keeping your job, so you may wish to consult with our arbitration attorneys before taking this step.
I was just offered a new job, and noticed a forced arbitration agreement in the paperwork that I was asked to sign. Should I sign it?
No. But you may have to in order to get the job. What then? As stated in the previous question, you have a difficult decision to make, although it may not matter whether you actually sign the “agreement” or not, you could still be bound by it.
If I think I have grounds to sue my employer, but am subject to a forced arbitration agreement, what do I do?
In this situation, it is important to consult with an attorney to determine what rights you may have. Depending on the issue involved and the provisions of the agreement, you may need to quickly make a strategic decision about whether to proceed under the forced arbitration process that is in place, or to challenge the process in court. There may be fast-approaching deadlines that will affect your legal strategy, so it is important to consult with our emplyoment lawyers immediately in order to preserve the widest range of options for yourself.