Employer Mistakes in Enforcing Arbitration Agreements

Many employers throughout California have conditioned their employment agreements on a requirement to resolve any and all conflicts through binding arbitration. Binding Arbitration is an alternative dispute resolution method that puts the power of resolution into the hands of a neutral arbitrator, rather than a jury. Although the process is very similar to litigation through the Courts, the benefits to arbitration are that it is timesaving, cost effective, and removes the threat of outrageous rewards by a “runaway” jury .

We have found that although both Federal and California law favor the enforceability of arbitration agreements, small details within the agreement, or those actions the employer takes after the execution of the agreement can allow the employee to disregard their agreed upon resolution process in its entirety, and continue his/her claim through the courts where the chips are largely stacked against the employer.

1. One mistake employers have made is to have an arbitration agreement that is referenced either in the employment agreement, or employee handbook, but no evidence that the employee has ever seen a stand-alone, separate agreement, had access to it, or were even aware of how to gain access to the agreement. Although a Court will recognize the agreement is incorporated into the employment agreement by reference, this is not enough if the employee can prove s/he did not have easy access to this agreement, or in the alternative if the employer cannot prove that that employee did. To avoid this issue, the separate, stand-alone arbitration agreement should be provided to the employee with all other onboarding documents, allow for the employee to fully read an understand the document, ask questions, and provide an opportunity for the employee to contact an attorney or to confirm that s/he has waived this right. These agreements must be signed by a representative of the employer, and the employee, and the fully executed copy of the arbitration agreement should be maintained as part of the employee’s personnel file. Lastly, there must exist a written company policy that outlines an employee’s right to access the personnel record, which would necessarily include the arbitration agreement.

2. Some employers attempt to protect themselves by including provisions that provide the opportunity to revoke the arbitration agreement, or to modify its terms at any point, without the consent of the employee. These unilateral revocation/modification provisions can cause an arbitration agreement to be found “unconscionable”, and otherwise unenforceable. Although the Courts have saved employers who did not act on this provision in their agreement, this is a significant risk an employer assumes. Employers must remember that this is a mutual agreement between both parties to resolve their disputes in arbitration, regardless of who the complainant is. Which brings another point to light, the employer must also bring any claims against the employee to arbitration, as well.

3. Although the general “American” rule is that parties must bear their own costs of litigating a claim, under California law, an arbitration agreement (at least within the employment context) must provide that the employer will pay for all those costs that are unique to arbitration. We have seen agreements which included costs to be split between the parties, in what appeared to be a mistaken sense of fairness. The Courts do not agree with this approach and any attempt to have the employee pay for the time and costs associated with the arbitrator, or any other cost unique to arbitration, could end with your agreement being found unenforceable as a matter of law.

4. Employers who arbitrate employment-related disputes often may find that certain arbitrators are more competent or knowledgeable in a field than others and wish to use that arbitrator again in the future. This is a mistake. An arbitration agreement must allow for the mutual selection of an unbiased and neutral arbitrator. If the agreement calls for a specific arbitrator, or one within a small firm that the employer has used in the past, this may trigger the “repeat player” doctrine and could defeat your arbitration agreement. Most arbitration agreements suggest a national arbitration company such as the American Arbitration Association or JAMS, for which the rules of the organization disclose all prior use and knowledge of the arbitrators to each party to allow for a fair, neutral, unbiased selection.

This short list includes only a few examples of the issues companies face in their attempts to resolve employment-related matters through mandatory arbitration. Although the Courts do their best to protect the arbitration agreements of employers, the substance of the agreements or conduct of the employer will often get in the way. It is for this reason that it is important for employers to hire competent legal counsel skilled in employment agreements and arbitration agreements as a whole, who can also counsel the company into taking measures and implementing policies that will protect this agreement even after it is presented and signed.