10 essential elements for effective arbitration agreements
Tuesday, June 12, 2018
The U.S. Supreme Court recently ruled that employers may require employees to sign class-action waiver provisions without violating the National Labor Relations Act.
This decision has prompted employers to reconsider whether to require employees to sign binding arbitration agreements. If you are considering requiring employees to sign such agreements, this article outlines 10 essential elements to include in such agreements.
1. Governing Law of the Arbitration Agreement
Federal law governs employment arbitration agreements if the agreements are in writing, the transaction involves interstate commerce, and the agreement would be upheld as a contract under state law. Make sure all of these basic requirements are met.
2. Existence of a Contract
As arbitration agreements are considered contracts, the legality of whether a contract exists is reviewed under state law. State contract laws typically require that the parties have the capacity to contract, that the parties mutually assent to the terms and that valid consideration, or a benefit to the signor, exists.
Depending on the state, courts have found pre-dispute arbitration agreements binding when contained in an offer letter, an application for employment, an employee handbook, stand-alone documents and on benefit forms. On the other hand, some states are not as quick to find that a contract exists.
Employers should ensure that any arbitration agreement is only signed by those employees aged 18 years or older, and not by any employees with mental infirmities that prevent them from having capacity (i.e., those with a legal guardian).
As for mutual assent, the execution of the agreement provides this as both parties agree to the terms and execute the agreement.
To have a contract, consideration must exist. Consideration is the "benefit" received by the parties signing the agreement. Although the agreement is governed by federal law, the determination of whether consideration exists to create a valid contract (or "agreement") is made under state law.
If you implement an arbitration program, we suggest providing the agreement with your new hire packet and having new employees sign the agreement before starting work. This way, employees agree to arbitration in exchange for the employer’s decision to employ them, providing consideration.
In some states, existing employees can be required to sign the agreement as both continued employment and mutual assent will serve as valid consideration.
However, the safest approach is to extend some additional consideration to current employees, such as a raise in pay, new perk such as a vehicle or even a nominal payment. Before making a final decision, it is wise to research applicable state law.
Most courts require that arbitration agreements be mutually binding, meaning that the employer must also be bound to arbitrate, or the agreement is unconscionable as being too favorable to the employer.
In fact, some third-party commercial arbitration groups that provide arbitrators and arbitration services require mutuality in an agreement before assisting with arbitration. Accordingly, an agreement should require mutuality with respect to all obligations. An exception can be carved out allowing employees to file charges with the Equal Employment Opportunity Commission (EEOC) as required under federal law.
Also, employees and the employer may request temporary restraining orders or preliminary injunctive relief from courts to preserve the status quo, particularly with respect to restrictions on disclosures, solicitation and competition.
5. Class-Action Waiver
A class-action waiver prohibits employees from bringing class or collective action lawsuits or arbitrations against the employer. Such provisions are very beneficial to the employer because such class and collective action lawsuits are very expensive to litigate.
Additionally, because the likely recovery on an individual basis is often small, plaintiffs’ attorneys are not as likely to bring suit if they cannot do so on a collective or class-action basis.
6. Opt-out Provision
Courts often hold that arbitration agreements are adhesion contracts if employees are required to agree to arbitrate disputes in remain or be employed. Arbitration agreements that are too favorable to the employer are generally held unenforceable as unconscionable.
To avoid this result, many employers include "opt-out clauses" that give employees the right to reject arbitration within a certain time frame. Several courts have declined to find arbitration provisions procedurally unconscionable where an opt-out clause was included in the arbitration agreement.
The presence of an opt-out clause does not automatically prevent a judge from determining that an arbitration agreement is unconscionable. However, in cases where an arbitration agreement with an opt-out provision was found unconscionable, the opt-out provision provided a short rejection period (such as one (1) day) and did not stand out in the agreement.
A 30-day period should minimize the risk of a finding that the agreement is an adhesion contract. We also recommend that the opt-out provision be in bold face print in the agreement. An opt-out provision can be included for new hires and/or current employees.
The opt-out clause allows the flexibility of ensuring consideration by mandating execution of the agreement, but prevents an adhesion contract as employees can choose to opt-out.
7. Employees' Rights Under the Law
To minimize the risk of a finding that the agreement is unconscionable, employees should not be required to give up substantive rights that would be available to them under the law.
Also, the employer pays the costs of arbitration, other than what an employee would pay in a court proceeding, as well as the arbitrator’s fee. However, the employee would be responsible for the arbitration filing fee and for his or her own attorney’s fees and expert witness fees.
Several cases have discussed responsibility for arbitration costs, and courts generally agree that an arbitration agreement is invalid if employees are precluded from arbitration due to prohibitive costs.
8. Waiver of Jury Trial
The law on whether or not waivers of a jury trial provisions will be enforced is still developing. In some jurisdictions, judges believe that such clauses violate the public policy of the state. Before implementing an arbitration program, research the applicable state law on this critical issue.
9. Governing Body Over Disputes
Arbitration services can be costly, and each organization has its own set of rules that must be followed.
Each commercial dispute resolution group provides arbitration rules. Copies of the Arbitration Rules propounded by AAA and JAMS can be found at their websites (www.adr.org and www.jamsadr.com) for your review.
In contrast, self-administration of an arbitration program can be burdensome and stressful. It is also more expensive to set up, even though in the long run it may be cheaper to operate.
Because administering your own program could be difficult, we recommend that you start by using a commercial dispute resolution group, such as AAA or JAMS. In the future, you can consider developing your own arbitration rules and creating your own arbitration program.
10. Practical Tips
To ensure employees acknowledge the agreement and to dissuade arguments that the employer "hid" important terms, such as the opt-out provision, we suggest that you have a New Hire Packet cover sheet listing all documents employees must sign, and an Information Sheet that provides information on arbitration.
The New Hire Packet should include a Cover Sheet and Information Sheet to be modified as needed. The Information Sheet should cover the basic provisions of the agreement.
You should add language to your application to notify applicants of the agreement in advance of accepting employment with the employer. Employers should keep both the executed application acknowledging that the applicant has been informed of the agreement that will be offered upon employment, as well as the executed agreement.
Individuals who execute the agreement when offered a position with the employer will be bound by the agreement unless they exercise their rights under the "opt-out" provision.
Arbitration may not be a good fit for every employer. But, done properly, a binding arbitration program can be an effective tool for employers to manage employee-related claims.
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