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Arbitrating Workplace Disputes

The use of arbitration is increasingly under attack by the Obama administration, but it remains an attractive tool for employers. Such agreements, however, must not be one-sided or unfair, and employees must receive proper notification about the use of arbitration.

Wednesday, June 16, 2010
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Arbitration agreements have been an attractive tool for employers involved in workplace disputes as a way to try to avoid the costly and unpredictable results of jury trial. The benefit of arbitration was driven home when a New York federal court jury in May 2010 awarded a class of woman pharmaceutical sales representatives $250 million in punitive damages after finding that Novartis had engaged in a pattern or practice of gender discrimination in promotions and pay.

The benefits to arbitration in the employment arena include its streamlined dispute-resolution process, lower cost to the parties and the finality of the arbitration award compared to the lengthy appeals that often follow a trial result. 

Despite these benefits, the scope, reliability and fairness of these agreements as well as the decisions of the arbitrators themselves have continued to come under scrutiny in the courts as well as in Congress.

Part of the Obama administration's legislative agenda includes passage of the Arbitration Fairness Act, a law that would make pre-dispute, mandatory arbitration clauses in employment disputes unenforceable unless provided under the terms of a collective-bargaining agreement.

In December 2009, President Obama, as part of the 2010 Defense Appropriations Act, signed a law that prohibits government defense contractors with contracts of more than $1 million from imposing arbitration clauses on employees or independent contractors as the exclusive method of resolving discrimination claims or claims relating to harassment or assault.

Behind this "anti-arbitration" legislation is a belief that employees cannot vindicate their rights effectively in arbitration and should be permitted to always present their discrimination claims to a jury.

Since the Supreme Court in Gilmer vs. Interstate/Johnson Lane Corp. held that employees can make a binding agreement to arbitrate employment claims, employees have continued to challenge the enforceability of such agreements. The Supreme Court put that controversy to rest in Circuit City Stores, Inc. vs. Adams with a strong endorsement of the merits of arbitration in general. As it did a decade earlier in Gilmer, the court observed that arbitration can offer numerous benefits in employment cases.

Despite the general endorsement of arbitration as a method of resolving employment disputes, employers who make these agreements one-sided or unfair run the risk that the arbitration clause will be invalidated. 

For example, many courts have held that those portions of pre-dispute arbitration agreements that do not authorize the arbitrator to award the employee the full type of remedies available under the applicable law will not be enforced. 

The rationale for this result is that the forum in which employees' statutory claims are heard should not be outcome-determinative, and that to deny employees substantive rights bestowed by law would violate public policy.

In the event that an arbitration agreement imposes limitations on an arbitrator's ability to award punitive damages, where such damages would otherwise be available under statute, courts may deem such limitations as impermissibly restricting the scope of an employee's statutory remedies.

Similar to restrictions on a party's statutory right to punitive damages, courts may deem a limitation on an arbitrator's ability to award statutory attorneys' fees as impermissibly restricting the scope of an employee's statutory remedies.

Another basis on which employees attempt to challenge arbitration is by claiming they did not knowingly and voluntarily enter into the pre-dispute arbitration agreement or that they did not knowingly and voluntarily waive their right to a trial in court.

Generally, the law provides that, if the agreement to arbitrate fairly includes employment claims, the plaintiff is presumed to have read and understood all of the terms of that agreement by virtue of having signed it.

There have, however, been some judicial inroads in employers' abilities to implement arbitration programs.

One court recently addressed the question of whether a mass e-mail, informing employees of the implementation of a mandatory arbitration plan, can constitute sufficient notice. In Campbell vs. General Dynamics Gov't. Sys. Corp., the appeals court affirmed the district court's holding and concluded that General Dynamics' e-mail to its employees notifying them of the new arbitration policy failed to provide adequate notice. 

However, the court stressed that its holding should not be read as a general denunciation of e-mail as a medium for communicating changes in employment contracts to employees, noting that "e-mail, properly couched, can be an appropriate medium for forming an arbitration agreement." 

In this instance, General Dynamics did not have a history of using e-mail as a means of notifying employees of changes to the employment contract, nor had it required employees to affirmatively indicate that they had read the e-mail or that they understood that continued employment would be deemed acceptance of the policy.

Moreover, the content, tone and phrasing of the e-mail all served to downplay the importance of the new policy. General Dynamics, the court concluded, failed to employ "simple" and "readily available" steps that likely would have ensured the adequacy of the notice.

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Some opponents of arbitration stress the lack of meaningful judicial review of an arbitration award as the principle reason for disapproving of its use. The grounds for vacating or modifying an arbitration award are narrow, leaving a party with little means to challenge an award that it believes is unjust or inconsistent with the law. 

Arbitration awards will be overturned or modified where there is showing that the arbitrator: engaged in "manifest disregard of the law;" was corrupt or engaged in fraud or misconduct; was unduly partial to one side; exceeded his/her power; or issued an award that was contrary to public policy or was completely irrational, arbitrary or capricious.

Although mandatory pre-dispute arbitration agreements continue to be challenged, arbitration of employment disputes remains an acceptable alternative to litigation. 

Courts that uphold arbitration agreements of employment disputes suggest that employees do not give up any rights by agreeing to arbitrate claims, but rather only agree to have the same dispute adjudicated in a different forum. 

Although not every dispute may be suited for arbitration, prospective litigants would be well-served to consider arbitration techniques that offer a fair and balanced set of procedural rules to facilitate the prompt and mutually agreeable adjudication of disputes, whether employment or otherwise.

Michael Delikat -- global chair of Orrick's Employment Law Practice Group in New York -- was named one of Human Resource Executive®'s Most Powerful Employment Attorneys for 2010.

See also:

Facing Up to Obama

The 2010 Most Powerful Employment Attorneys

Federal Compliance Issues

When Social Networking and the Workplace Collide

Avoiding Class-Actions and Winning in Court

Other Trouble Spots

The Selection Process, Take Three

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