Nonprofit employers typically hire employees without any written agreement on an “at-will” basis, meaning that either the employer or the employee may terminate the employment relationship for any reason, at any time, with or without notice. Such arrangements provide maximum flexibility. But the employment relationship may otherwise be memorialized in writing, such as to provide for specific job expectations, accompanying work benefits such as paid leave and health insurance, intellectual property ownership, and the applicability of an employee handbook. Such written agreements may also provide for mandatory alternative dispute resolution (“ADR”).
ADR allows for a timely and cost-effective resolution of many employee issues, such as wage disputes, grievance issues, and allegations of employer wrongdoing. It is not appropriate for all employee issues, however, such as for employee discipline and sexual harassment (as addressed further below). ADR can include mediation as well as arbitration. Mediation is essentially a facilitated discussion aimed at seeking a mutually acceptable resolution between parties, conducted by a neutral mediator. It can be quite productive and is used by many court systems to promote settlement.[1] Arbitration is different in that it involves a privately paid arbitrator (or panel of arbitrators) effectively serving as judge and jury. The arbitrator, thus, will hear and receive evidence, albeit in a less formal way than a court, and then issue a ruling in favor of one party or the other, and with a binding result including an award of damages or other relief.
Should employers include mandatory ADR requirements as standalone written agreements with employees or within employment agreements more generally? This article addresses the legal enforceability of arbitration clauses in employment agreements, along with recommendations for how and when to implement mandatory arbitration clauses. Such considerations apply similarly to potential mediation requirements. Employers should keep these important elements in mind, to the extent they intend to pursue private arbitration to settle conflicts and utilize written employment agreements.
Mandatory Arbitration Agreements
Mandatory arbitration agreements in the employment context require an employee to participate in arbitration, instead of filing a lawsuit (or sometimes as a precondition to filing a lawsuit). Such agreements could save an employer hundreds of thousands of dollars in legal fees, since lawsuits are typically far more expensive than arbitration. The Federal Arbitration Act (“FAA”) provides for legal enforceability of arbitration requirements, and the legal enforceability of such agreements have been upheld for many employment-related situations.[2]
Notably, while the Supreme Court has repeatedly upheld employment-related, mandatory arbitration agreements as binding, the Court has also confirmed an employee’s right to take other legal action as well, such as filing a discrimination complaint with the federal Equal Employment Opportunity Commission even when a mandatory arbitration agreement is in place.[3]
In seeking to effectively utilize mandatory arbitration agreements, employers thus should understand that such agreements may involve certain limitations. The following sections explore related limitations further and provide recommendations for using mandatory arbitration agreements.
Mandatory Arbitration and Specific Employment Areas
Worker Classification – ADR Implications and Government Scrutiny
A key initial consideration for any worker arrangement is whether a worker is properly classified as an employee or an independent contractor.[4] If the classification issue is contested, a government agency charged with enforcing certain employment-related laws may compel judicial intervention, superseding any mandatory arbitration clause or agreement. For example, the federal Department of Labor (“DOL”) has the authority to assert claims against employers under the Fair Labor Standards Act (“FLSA”) for violations of applicable legal requirements, even if mandatory arbitration agreements otherwise apply.[5]
Courts still consider mandatory arbitration agreements otherwise valid and binding for resolving worker disputes. But should the DOL or other government agency challenge an employer’s worker classification, such as to assert that a worker is an employee and eligible for a host of employment protections, litigation may be imminent. Historically, the DOL has only intervened in cases where egregious misconduct occurs, so such government agency involvement is rare. But nevertheless, nonprofits should consider worker classification carefully, and regardless of whether they use mandatory arbitration agreements.
Collective Bargaining and Employment Disputes
The Supreme Court has recognized that employment agreements requiring arbitration do not violate the National Labor Relations Act (“NLRA”), which primarily concerns union-related activity. The National Labor Relations Board (“NLRB”)—the government agency charged with enforcing the NRLA—had indicated that it would strike down agreements that interfered with employees’ rights to access and file charges with the NLRB. However, the NLRB then clarified that as long as a contract clause reminds employees of their NLRA rights, such disclosure is sufficient to render the agreement enforceable in employment disputes.[6]
Sexual Assault and Sexual Harassment
The “Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act” was enacted in early 2022. This new federal law bars enforcement of mandatory arbitration for claims involving sexual misconduct. The Act allows an employee alleging sexual assault or harassment to pursue a claim in court rather than through arbitration, regardless of the existence of a mandatory arbitration clause in their employment agreement. This law, thus, significantly limits potential use of arbitration within this specific context; employers should be forewarned of this resulting legal implication.
Additional State Law Implications
In addition to federal exceptions to mandatory arbitration agreements, several states have their own laws limiting mandatory arbitration agreements in the employment context. For example, New York enacted Section 7515 of the New York Civil Practice Law and Rules in 2018 which voided any mandatory arbitration clauses relating to sexual harassment claims. In 2019, New York extended this law to all claims of discrimination. Such laws have received mixed results in court rulings. For example, the above New York law was voided because federal courts determined it was pre-empted by the FAA. While precedent suggests state law addressing mandatory arbitration agreements will eventually be pre-empted, employers should still be aware of any relevant state laws where employees work to ensure optimal legal compliance.
Developing Mandatory Arbitration Agreements
A nonprofit employer that decides to use a mandatory arbitration requirement in an employment-related agreement will want to ensure that the requirement is legally enforceable to the maximum extent possible. The following recommendations, presented within an employer-employee context but equally applicable to the independent contractor context, will promote that goal.
Keep the Agreement Separate from the Employee Handbook
In order to protect the at-will nature of employment, handbooks usually contain a statement saying the handbook is not an enforceable contract. Some jurisdictions interpret this provision to preclude any legally enforceable obligations contained in the handbook, thereby invalidating any mandatory arbitration provision. While such provision could still be included in the handbook for review purposes, a mandatory arbitration requirement should be separately addressed such as in a legally binding offer letter or other written employment agreement.
Provide Sufficient Consideration
In order to create a binding contract, both parties must make a “bargained-for exchange” with sufficient “consideration” (e.g., both parties are getting something of value that they’ve agreed to). In the case of mandatory arbitration agreements, legally sufficient consideration may be established by reference to an offer letter or other written employment agreement (as mentioned above) specifying conditions of employment, including arbitration. The employer offers employment partially in exchange for the prospective employee’s promise to arbitrate disputes related to the employment relationship. After an employee begins, an employer can still introduce a mandatory arbitration policy but there must be some additional consideration (e.g., a pay raise and/or promotion). Some courts may view continued employment as sufficient consideration, but applicable legal standards vary among states.
Ensure the Agreement is Fair
If a court deems the terms of the agreement as unfair, the court may in turn hold the agreement unenforceable. Examples of unfair arbitration agreements include one that shortens the legally applicable statute of limitation period (the period of time someone has to file a claim in court after the incident occurs), one that limits the statutory remedies, or one that only mandates arbitration for employee-initiated claims but not for employer-initiated claims.[7]
Obtain Signatures from Both Parties and Never Unilaterally Update the Agreement
It is important that the employee and the employer sign the agreement. Either electronic signature or a “wet” physical signature should be sufficient, but getting acknowledgement via email or verbally may not suffice in creating an enforceable arbitration agreement, especially if any accompanying ambiguity exists (e.g., which types of claims exactly did the parties agree to arbitrate). Additionally, any later updates to the agreement must be supported with further consideration and formal execution of the revised agreement.
Clearly Define the Terms and Scope of the Agreement
The arbitration agreement’s language determines the terms and scope of the agreement. A carefully drafted agreement is sufficiently narrow or broad enough to cover the type of disputes the employer wishes to resolve by arbitration. To that end, consider the following measures.
Internal Resolution Efforts
Employers may draft the agreement requiring parties to participate in good-faith efforts to settle the dispute before engaging in arbitration. This measure could include filing a complaint with direct management, making full use of an internal complaint procedure, and reporting the issue to Human Resources or the Executive Director of the organization. Requiring invocation of internal complaint procedures as a prerequisite to arbitration will often result in successful resolution of a complaint in the most cost-effective manner.
Determine the Scope
Employers may include a broad arbitration clause or one that has more limited application. Broad language would apply to “any dispute or claim … arising out of or relating in any way to this Agreement,” whereas narrow language would apply to claims arising out of the employment relationship or perhaps only specified types of employment-related disputes. Employers should consider what types of employment claims they may want to file in court instead of arbitrating and ensure the scope of the agreement excludes such claims.
As detailed above, it is important to exclude non-waivable claims in the arbitration agreement. This would include sexual harassment and sexual assault claims as well as workers compensation claims brought by the government. Additionally, the arbitration agreement cannot limit the employee’s ability to file a claim with the EEOC or the NLRB.
Require an Established Arbitration Institution
The agreement should state what type of organization will administer the arbitration. The forum should provide for a neutral arbitrator, adequate discovery, and written arbitration awards. Avoid listing a specific arbitration forum because employees could claim the arbitrator pre-selected is biased against them.
Specify the Number of Arbitrators
Employers can specify one arbitrator or a panel of arbitrators in the agreement. While limiting the agreement to one arbitrator is more cost effective, it may increase the unpredictability – i.e., one person’s judgment versus a collective panel’s ruling.
Include Class Action Waivers and Statements Regarding the NLRA
The U.S. Supreme Court has ruled that class action waivers in arbitration agreement are enforceable, finding that the waivers do not violate Section 7 of the NLRA. Employers may wish to include such waivers, to limit exposure to a multiplication of claims. While these provisions are not as important to smaller employers, it is better to include in an abundance of caution.
Employers should also consider including a statement in the agreement stating an employee’s rights under the NLRA. Such statements will generally suffice to ensure the agreement is legally enforceable under the NLRB’s prior rulings.
Include a Survival Clause
To avoid the arbitration agreement ending with the employment relationship’s termination, include a provision explicitly stating the duty to arbitrate survives the termination of employment.
Include Choice of Law and Venue
Consider whether the agreement should be governed by federal or state law. In most cases, federal law will be the better option, but the choice of law must be related to the parties in some way (i.e. where the employees work or where the organization is headquartered and/or incorporated). The venue (i.e., court location) should also be related to where the employer is located to avoid costly travel expenses.
Consider a Fee-Shifting Provision
Fee-shifting provisions require the losing party to pay the attorney’s fees. An employer may wish to share the cost of the arbitrator no matter the outcome. Alternatively, a fee-shifting provision may be included to shift the risk of loss to the employee. Such provision may have the effect of encouraging an employee to resolve a dispute before arbitration to avoid the possibility of bearing all costs in the event of loss.
State the At-Will Nature of Employment
Importantly, the agreement should also include a statement clarifying that the employee’s status as an at-will employee does not change upon entering the agreement.
Conclusion
Generally, mandatory arbitration agreements are allowed and encouraged in employment contexts. Employers should be aware though of relevant state law and situations in which the agreement may become unenforceable. It is always prudent to have an attorney review a new agreement or policy before implementing it to ensure optimal legal compliance.
[1] For more information about mediation, please see our firm’s blog article – Mediation FAQs.
[2] See e.g., Circuit City Stores v. Adams, 532 U.S. 105 (2001).
[3] EEOC v. Waffle House, Inc., 534 U.S. 279 (2002) (arbitration agreement does not bar the EEOC from pursuing victim-specific relief in litigation on behalf of an employee who files a timely charge of discrimination).
[4] For an extensive discussion of this employee versus independent contractor issue, please see our law firm’s blog article.
[5] Workers’ compensation claims typically involve an employee who is injured on the job, seeks benefits through the employer’s workers compensation insurance, and has medical bills and lost wages resulting from the injury. The Perez v. Arizona Logistics, Inc. court ruling illustrates the potential implications. In that case, the DOL obtained a consent judgment requiring the employer to pay $5.75 million in back wages, damages and penalties for violations of the FLSA stemming from misclassifying its delivery drivers as independent contractors. The employer tried to force the Labor Department into arbitration based on their workers’ contractual arbitration requirements. The court affirmed the DOL’s independent authority to recover unpaid wages and damages notwithstanding the otherwise applicable private arbitration agreements
[6] See Anderson Enterprises, Inc. d/b/a Royal Motor Sales, 369 NLRB No. 70 (2020).
[7] See Ingle v. Circuit City Stores, Inc., 328 F.3d 1165 (9th Cir. 2003).
