Better for Everyone: Implementing Your Mandatory Arbitration Program

Winstead PC

Winstead PC

Mandatory arbitration agreements for employees have been enforceable for decades.  Over the last several years, there has been an ongoing controversy between the Fifth Circuit Court of Appeals, among others, and the National Labor Relations Board as to whether mandatory arbitration agreements which prohibit collective actions are enforceable.  In the recent decision of Epic Systems Corp. v. Lewis, the U.S. Supreme Court has now held that employers may impose mandatory arbitration agreements which deny employees the right to file collective action arbitrations.  In other words, agreements requiring employees to proceed individually in arbitration are enforceable.  In the wake of this decision, many employers are opting to require their current employees to agree to mandatory arbitration.  This presents a number of questions:

  • Should the arbitration requirement be contained in a separate agreement, or should it be a part of the company’s handbook and policies?
  • What should a reasonable arbitration program, policy, or agreement contain?
  • How should it be explained to affected employees?
  • What are the best methods for actually implementing the policy or agreement?
  1. Agreement or Policy?  A separate agreement signed by both the company and the employee is probably the best method of implementing a mandatory arbitration program.  Many companies, however, prefer to include it as part of the employee handbook.  In that case, any language in the handbook which states that the handbook is not a contract needs to be modified.  The modified language should prove that the arbitration policy is, in fact, contractual and binding and that the employer cannot modify the arbitration agreement once a claim has been filed, but can do so otherwise.  Companies using a separate agreement should have employees sign the agreement either physically or electronically.  Companies using a policy should have employees sign a separate acknowledgement specific to the arbitration provisions of the employee handbook or policy.
  2. What should a reasonable arbitration program, policy, or agreement contain?
    1. The agreement or policy should address the existence of supporting consideration. Current employees can be required to sign an arbitration agreement in states that recognize continued employment as sufficient consideration to support the agreement to arbitrate future employment disputes.  While some states do not recognize continued employment as sufficient consideration, the parties’ mutual agreement to surrender their rights to trial by jury may instead supply valid consideration.
    2. Whether using an arbitration agreement or policy, arbitration should be mandatory for all claims involving the employee, the company, its affiliates, and/or any of its present or former officers, directors, shareholders, or employees.  It may also include claims against the company’s customers, vendors, or suppliers. 
    3. It should cover any and all claims related to a person’s employment or the termination thereof, whether arising under contract or under any statute, ordinance, or regulation, except to the extent that mandatory arbitration is specifically prohibited.[1]  The agreement or policy should provide that employees may initiate administrative actions with the Equal Employment Opportunity Commission (“EEOC”) or a state equivalent, but then they must initiate an arbitration proceeding, rather than a lawsuit, based on the action of the administrative agency.
    4. The agreement or policy should make clear that neither worker’s compensation claims nor claims for unemployment compensation are subject to arbitration.  It should also provide that the arbitration agreement or policy does not prohibit either party from seeking injunctive relief for breach of agreements regarding confidentiality, non-competition, or non-solicitation. 
    5. Many arbitration agreements and policies require, as a prelude, that the parties engage in mediation or another form of a pre-arbitration dispute resolution process.  This could also be voluntary.  Having this pre-arbitration option may also help improve employee acceptance of mandatory arbitration as part of the overall dispute resolution program. 
    6. The American Arbitration Association (“AAA”) is the most universally used arbitration organization.  AAA has developed specific rules for employment disputes and has its own separate mediation procedures and mediators.  The agreement or policy should make clear that the arbitration is to be administered under the AAA’s rules for resolution of employment disputes and before one arbitrator whose decision is final.  It should also make clear that any dispute or issue as to interpretation or enforcement of the arbitration agreement or policy should be solely resolved by the arbitrator and not by the court. 
    7. The agreement or policy should impose limits on discovery, typically prohibiting requests for admissions and interrogatories, and limiting the number of requests for documents and/or depositions for either party, unless the arbitrator rules otherwise. 
    8. The agreement or policy should provide that the arbitrator’s decision is final and that both parties are waiving any right to appeal that decision.
    9. The agreement or policy should also contain a severability clause.  If a court finds one provision in the agreement to be problematic, rather than invalidate the entire agreement, a severability clause would allow the court to strike the problematic provisions and otherwise enforce the agreement as written. As this area of law continues to evolve, a provision which is not problematic today may nevertheless become problematic in the future.  A severability clause may save the enforceability of the agreement or policy down the road.
    10. Finally, of course, the agreement or policy should include provisions that arbitration cannot be brought as a class or collective action.
  3. How should it be explained to employees?  Once the arbitration agreement or policy has been prepared, it should be presented to employees with a reasonable explanation by a representative of the company’s Human Resources team.  This can occur either in a meeting, by e-mail, or in the form of a webinar or Skype conference, depending on the number of employees affected or involved.  The presentation should include a brief summary of the agreement or plan.  Importantly, the presentation should address the benefits of arbitration, and where possible, emphasize the benefits from the prospective of the employees.  Among the benefits are:
    1. The arbitration process is almost always more efficient than a trial.  Disputes that take years to resolve in courts can be resolved in as little as six months through arbitration.
    2. Under the AAA rules, the process is far cheaper for an employee, who pays only a modest filing fee.  The employer pays the balance of the administrative costs, as well as the fees of the arbitrator. 
    3. The process is confidential.  To the extent that an employee is making derogatory claims about the company, or to the extent that the company is providing evidence of the employee’s poor performance, misconduct, negligence, or other wrongdoing to defend against the employee’s claims, that information and those documents are not a part of any public record. 
    4. Arbitration allows for flexible scheduling. The parties themselves generally set the schedule for arbitration, as opposed to having a judge impose a schedule.  The parties also can agree to the location of arbitration and other terms and conditions.
    5. Selection of the arbitrator is a reasonably fair process for both sides.  The parties participate in the selection of the arbitrator, rather than having a judge assigned to them arbitrarily.  Under the AAA rules, each party is provided a list of proposed arbitrators from which they can select those which they reject and rank the rest in order of their preference.  Once there is a match between the parties, the AAA will assign that arbitrator.
    6. Under the AAA rules, the arbitrators are generally experienced labor and employment attorneys and/or judges. 
    7. The proceedings themselves are generally more informal than in court.  Technical rules of civil procedure and evidence do not apply, and, in some cases, testimony may be submitted in the form of an affidavit. 
    8. There are disadvantages of arbitration born by both parties:
      1. Both parties are waiving their right to a jury trial and their right to appeal an adverse decision, in exchange for a speedier, more efficient, and cheaper dispute resolution process.
      2. Arbitrators are less likely to grant motions for summary judgement or other dispositive motions.  They have an economic interest in keeping the case going, while judges have an interest in establishing a strong disposition rate.
      3. The process is more expensive for the company since it must pay the administrative costs and the fees of the arbitrator. 
  4. What are the best methods for actually bringing the agreement or policy into effect?  Once the agreement or policy has been presented and explained to the employees, and depending on the size of the workforce and its technical network capabilities, the agreement and/or the acknowledgment of the new policy can be distributed to the affected employees who are asked to acknowledge their consent by an electronic signature or other electronic means.  It is predictable that not everyone will immediately sign, acknowledge, and/or return the new agreement or policy.  Some follow-up methodology will be needed.  For example, many companies implement a system that prevents an employee from completing their computer logon until and unless they have reviewed the new agreement or policy and acknowledge their consent to it. 

In sum, when implementing an arbitration program affecting current employees, it is important to clearly explain to the employees what the arbitration process will look like, as well as the benefits to both parties.  This approach will help employees understand why the company has chosen to implement the new process, which, in turn, will help improve employee acceptance.

[1] For example, proposals are currently pending in Congress and in many states to prohibit mandatory arbitration of sexual harassment claims.


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