Enforceability of an Arbitration Clause in an Employment Contract

man signing a contract
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Written by Roxana.

Most employers make their employees sign an employment contract when they hire them. These employment contracts usually contain, among other terms, an arbitration clause.  This clause precludes an employee from suing the employer in court for wrongful termination of employment, discrimination or any other violation under the agreement. It prescribes arbitration as the mode of dispute resolution. When employees sign the employment contract, they agree to subject themselves to arbitration in case of a dispute and not go to court.

The arbitration process

Under an arbitration process, a neutral party, known as the arbitrator, is appointed. He hears both the parties and goes through all the evidence. After having reached a conclusion, he gives his judgment which is known as the arbitration award. The process is less formal than court proceedings and less expensive. However, there are certain drawbacks for the employee. Unlike in a court case, the employee cannot get all the files and documents that he may need to strengthen his case. It is the employer who holds most of the information and may refuse to furnish relevant documents. Moreover, the decision of the arbitrator is final in most cases and cannot be appealed. Hence, the employee is left with no choice but to accept it.

When arbitration clause will not be enforced

The Federal Arbitration Act  favors enforcing arbitration clauses. Other states have statutes favoring arbitration. With regards to arbitration clauses in employment contracts, the United States Supreme Court has held them to be enforceable. Thus, employees cannot bring class action lawsuits against their employers. However, there are certain circumstances when such arbitration clause is not enforceable.

When the arbitration agreement in unconscionable: Unconscionability can be procedural or substantive. However, an employee has to prove both in order to render an arbitration clause in his employment contract unenforceable.

Procedural unconscionability: It considers the circumstances under which the contract was signed. For example, if the contract was impossible for the employee to understand due to overly complicated language, or the arbitration clause was written in fine print, or the employee was rushed into signing the contract or signing the contract was made a condition for him to get the job, it would lead to procedural unconscionability.

Substantive unconscionability: It looks into the substance (terms) of the contract such as scope of discovery under arbitration, the party who will bear the cost and whether the proceedings will be confidential. Sometimes, if the court finds that the employee will have to pay more for the arbitration process than he would have paid for a lawsuit, it may render the arbitration clause unenforceable.

Precautions to be taken by the employer

In order to render the arbitration clause in its employment contract free of any challenge, the employer should keep in mind certain points:

  • Provide the arbitration agreement as a stand alone agreement to the employee. Sometimes, employers provide it in a handbook and make the employee sign a declaration that he agrees to all the terms of the handbook. Such a scenario can give rise to claims that the employee was not aware that the arbitration clause was concealed in the handbook.
  • Employers should ensure that they are able to convey mutual consent for arbitration. If the court feels that negotiations with respect to the arbitration clause were one-sided, with the employer dictating the terms, it may not enforce the clause.
  • Employers should agree to bear the cost of the arbitration process for all employees. Exceptions may be made for high-level employees, though some states in the US do not allow that. Asking the employees to pay for arbitration or splitting costs with them may lead to substantive unconscionability.

Drafting a fair arbitration agreement

Since the employer has the upper hand in employment contracts, the employee can only negotiate some of the terms. It is important for him to negotiate to get a fair arbitration agreement. Some of the provisions that he can discuss are:

  • The arbitrator: The employee should bargain for equal rights to choose an arbitrator. Considering the significance of the arbitrator in the entire process, he should be selected by a process that is fair to both parties.
  • The employee can negotiate to require the arbitrator to disclose any information that may link him to the employer. Any conflict of interest on the arbitrator’s part will be prejudicial to the fairness of the arbitration process.
  • The employer should argue to get all the remedies that he may have got in a traditional lawsuit. For example, the employer cannot, by way of the arbitration agreement, prohibit the employee from getting damages for mental stress.
  • The employer must not give up his right to engage a lawyer to represent him in the arbitration.

An employment contract, by nature, is tilted in favor of the employer because it is the party that drafts it. Many times, employees sign the contract without giving it much thought because they are excited to start a new job. Unless the employee is an experienced professional who joins the employer at senior level, employees generally do not have much bargaining power when it comes to employment contracts. It is only in case of a dispute that they realize the implications of the contract and the arbitration clause contained therein. However, they should negotiate for better and more balanced terms to make the agreement fair.

Author Bio:

Roxana, a writer by calling and an academic has created scintillating and remarkable content for dozens of websites in the purview of the Business Sector. She has a fair understanding of the inner workings of several business establishments, making her the foremost expert in this field. Roxana can be reached at agreements.org.

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