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Is arbitration right for your company? (Arbitration).

The dramatic rise in employee lawsuits, the costs associated with defending these lawsuits and the potential for large judgments have employers looking for ways to resolve employment disputes without resorting to the court system. One clear result: Employers are turning to compulsory arbitration programs as an alternative to litigation.

This is hardly a new phenomenon, but it has been accelerating. Recognition of arbitration as a means to resolve disputes dates back to 1925, when the United States Congress passed the Federal Arbitration Act (FAA) to provide a mechanism for individuals and entities to sue in federal court to enforce arbitration agreements.

Through arbitration agreements, parties present their case to a neutral third party empowered to render a decision, instead of to a judge, jury or administrative agency. The arbitrator, who must be independent and impartial, renders a decision after both sides present evidence and legal arguments at an arbitration hearing. Most often, parties agree that the arbitrator's decision is final and binding on the parties. The arbitrator's decision cannot be overturned by the courts, except in rare circumstances.

Recent Supreme Court Decisions On Arbitration

The U.S. Supreme Court has issued two recent decisions pertaining to arbitration of employment disputes that employers should consider before adopting compulsory arbitration agreements.

On March 21, 2001, the top court rendered an opinion in Circuit City v. Adams that greatly enhanced an employer's ability to enforce compulsory arbitration agreements. Circuit City, the electronics firm, required an employee to sign an employment application that contained an arbitration clause. Following his termination, the employee sued Circuit City in state court for discrimination under the state statutes.

In response, Circuit City moved to compel arbitration, relying on the FAA. The Court held that the FAA applied, and that the arbitration agreement was valid and enforceable. The Court's decision made clear that the FAA applied to the vast majority of employees and was available to employers seeking to enforce compulsory arbitration agreements.

While Circuit City may have given employers a greater chance at compelling arbitration, on Jan. 15, 2002, the Supreme Court, in EEOC v. Waffle House Inc., diminished the enforceability of arbitration agreements. The Court upheld the right of the Equal Employment Opportunity Commission (EEOC), the federal agency that enforces federal anti-discrimination laws, to seek all available remedies for job discrimination, regardless of an arbitration agreement signed by the employee. In Waffle House, the employee signed an agreement to arbitrate all employment disputes. After he was discharged, he filed a charge of discrimination with the EEOC without proceeding to arbitration.

After finding probable cause that discrimination occurred, the EEOC filed a lawsuit against Waffle House seeking injunctive relief to stop its past and present unlawful employment practices, as well as relief for employees, such as back pay, reinstatement and compensatory and punitive damages. Waffle House moved to compel arbitration under the FAA.

The federal appeals court enforced the arbitration agreement as it related to damages specific to the employee. However, the Supreme Court disagreed and found the EEOC had authority to exercise its full enforcement powers, including damages specific to the individual employee, because the employee, not the EEOC, had agreed to arbitrate.

After Waffle House, employers cannot rely upon compulsory arbitration agreements to prevent employees from filing charges with the EEOC or prevent the EEOC from suing on behalf of employees. However, because the EEOC files suit in less than 1 percent of all charges, the implications of Waffle House may be limited. Unfortunately, the case leaves open the question of whether the EEOC would be bound by: (1) an employee's execution of a signed settlement agreement, or (2) an arbitration award or judgment. Employers should consider these issues when deciding whether to require employees to sign compulsory arbitration agreements and when weighing litigation over its enforcement.

Arbitration and State Laws

After Circuit City and Waffle House, employers wishing to adopt a uniform arbitration agreement still must consider state common law applicable to the enforcement of any contract. In particular, the FAA does not preempt traditional contract defenses under state law, such as lack of consideration, mutuality, unconscionability, fraud and duress.

Not long ago, the New Jersey Supreme Court refused to compel a physician to arbitrate his claim of discrimination brought under the New Jersey Law Against Discrimination because his purported waiver of statutory remedies did not expressly mention that statute. According to the Court, "a waiver-of-rights provision should at least provide that the employee agrees to arbitrate all statutory claims arising out of the employment relationship or its termination. It should also reflect the employee's general understanding of the types of claims included in the waiver -- e.g., workplace discrimination claims."

More recently, the New Jersey Supreme Court, in Martindale v. Sandvik Inc., upheld the enforceability of an employee's agreement to waive her right to a jury trial and submit any disputes with her employer to binding arbitration. The waiver was contained in the job application, signed prior to her employment.

In finding the arbitration agreement enforceable, the Court held that the arbitration agreement was supported by consideration (i.e., offer of employment), and was not a contract of adhesion. The Court also held that New Jersey Family Leave Act claims and New Jersey Law Against Discrimination claims are not exempt from arbitration, and the jury trial waiver was effective. The Court deemed it important that the employee had the opportunity to question the application and the arbitration agreement, the employee brought the application home and was encouraged to consult an attorney before signing the documents. In light of this decision, New Jersey employers may consider including jury trial waivers in applications for employment.

Are Compulsory Arbitration Agreements Right for Your Organization?

The decisions mentioned above highlight the many issues facing employers in deciding whether to require employees to sign compulsory arbitration agreements. The table on this page outlines some of arbitration's perceived advantages and disadvantages -- though it's important to note that the advantages are not uniformly accepted by both lawyers and human resource professionals.

Assuming the benefits outweigh the risks, some factors the employer should consider in implementing and designing a mandatory arbitration program include: (1) whether the program is for all employees or a subset (such as non-exempt employees or employees of a particular division); (2) should the program be limited to new hires; (3) should the program be voluntary for existing employees; (4) should there be required steps before arbitration, such as grievance procedures, peer review or mediation; (5) what procedural rules should govern the arbitration and appeal of the arbitrator's decision; and (6) how arbitration costs should be handled. How these issues are addressed may make the difference in whether a court will enforce a compulsory arbitration agreement.

The decision to implement an arbitration program is complex and depends upon the particular employer's needs. While compulsory arbitration agreements may not completely prevent the problems associated with employment litigation, they may be the right choice for your organization.



1. Typically, lower awards than jury verdicts

2. Procedure is simpler, quicker and less costly than going to court

3. Decision-makers who are not as easily swayed as juries

4. Potential benefits to employers from being "repeat players" before arbitrators


1. Proliferation of employee disputes over relatively minor matters

2. Limited right of appeal

3. Tendency by arbitrators to "split the baby" to appease both sides

4. Diminished likelihood of obtaining summary judgment

Source: Jackson Lewis LLP

Gregory T. Alvarez is a partner and Nancy J. Arencibia is a litigator with the Morristown, N.J., office of Jackson Lewis LLP (, a law firm exclusively representing employers in labor, employment and employee benefits law.
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Author:Arencibia, Nancy J.
Publication:Financial Executive
Geographic Code:1USA
Date:Dec 1, 2002
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