In Employment Arbitrations, Prevailing Party Fee Provision "Chills" But Is Not Cool

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In recent years the United States Supreme Court has ruled in favor of businesses in several cases involving the enforceability of arbitration agreements.  But as illustrated by a recent decision by Florida's Second District Court of Appeal, Hernandez v. Colonial Grocers, Inc., courts will decline to enforce arbitration agreements that have a "chilling effect" on the filing of employment-related claims.

Jose Hernandez filed an action against Colonial Grocers alleging a violation of the Fair Labor Standards Act and Florida's worker's compensation anti-retaliation statute, section 440.205, Fla. Stat. Colonial moved to compel arbitration in accordance with its employee manual, which provided that "any controversy or claim arising out of or relating to the employment relationship" was subject to arbitration.  The arbitration provision also provided:

Although the parties shall initially bear the cost of arbitration equally, the prevailing party, if any as determined by the arbitrator at the request of the parties which is hereby deemed made, shall be entitled to reimbursement for its share of costs and reasonable attorneys' fees, as well as interest at the statutory rate.

The trial court granted Colonial's motion, and Hernandez appealed.

The Second DCA reversed the trial court's order, holding that the attorney's fee provision had a "chilling effect" that discourages employees from bringing Fair Labor Standards Act claims.  The court noted that under the FLSA, a prevailing plaintiff is entitled to an award of reasonable attorney’s fees, whereas the statute does not allow for prevailing party fees for the defendant. In contrast, under Colonial's arbitration agreement, whichever party prevails "shall be entitled to reimbursement for its share of costs and reasonable attorneys' fees." The result is that if the arbitrator were to declare Colonial the prevailing party, Hernandez would be obligated to pay Colonial's attorney's fees. "This renders the potential cost of arbitration to be far greater to Hernandez than the potential cost of civil litigation," the court wrote, "which under no circumstances would include Colonial's attorney's fees. As such… [the agreement] expose[s] him to a potential liability to which he would not be exposed if the litigation occurred in civil court because the federal statute specifically protects him from such liability."

The Hernandez decision points to one of the principal limitations of arbitration agreements:  They will not pass judicial muster if they defeat the remedial purposes of employment laws.  Employers that fail to recognize this and adopt arbitration agreements that limit an employee’s substantive rights, or that discourage employees from bringing statutory claims by making arbitration more expensive than litigation, will likely find themselves back in court.