Agreements to Arbitrate Statutory Employment Claims

• Suggested language to include in arbitration agreements

By Robert K. Sholl and Christian A. Jenkins

Most employers are familiar with the costs associated with claims brought under Title VII of the Civil Rights Act of 1964 (Title VII), the Equal Pay Act (EPA), the Age Discrimination in Employment Act (ADEA), the Americans with Disabilities Act (ADA), the Family and Medical Leave Act (FMLA), and parallel state statutes. Because investigatory agencies such as the Equal Employment Opportunities Commission (EEOC) and its state counterparts fail to screen out meritless complaints, employers often are forced to devote much time and money to dispose of even the most frivolous claims. These costs increase dramatically as claims move from the investigatory agency into state or federal court. Indeed, employers settle many cases simply because the cost of litigation exceeds or approaches the amount sought by the employee.

In most cases, arbitrating an employment claim is significantly less expensive than litigating in state or federal court.¹ Unlike courts, arbitrators do not have crowded dockets and can proceed to hearing under expedited schedules. Similarly, the pre-hearing procedures (that is,discovery, motion practice, and so on) available in arbitration usually are much less complicated and protracted than those available before a court. If employees can be required to arbitrate employment-related claims, the costs associated with such claims should decline significantly. However, arbitration is no guarantee of employer success, and mandating claims arbitration is not always easy.

The federal appellate courts disagree over when an employee can be required to arbitrate his or her statutory employment claim. Depending upon the location of where an employee works, different measures may be necessary before arbitration can be required. Such regional distinctions are likely to continue because, on Oct. 14, 1997, the U.S. Supreme Court refused to review three cases involving arbitration of such employment claims.² However, an agreement to arbitrate generally will be enforceable if the employee knowingly consents to arbitration, if no statutory remedies are forfeited, and if the arbitration clause language is drafted carefully to cover all claims sought to be arbitrated.

Where to put an arbitration agreement

Most employers give new employees a variety of documents to read and sign when they begin employment. An arbitration agreement can easily be incorporated within such documents. However, where such an agreement is placed within a document and how it is displayed can affect the extent to which the employee "knowingly" consents to arbitrate his or her statutory claims and, therefore, the extent to which the employee will be barred from taking such claims to court. While a variety of solutions are possible, individual agreements are most effective.

Collective bargaining agreements. The arbitration clause in a collective bargaining agreement generally cannot be used to require arbitration of a statutory employment claim. Many collective bargaining agreements contain general language that commits employers to nondiscriminatory employment practices on the basis of race, gender, disability, or age, or that directly identifies statutes such as TitleVII, the ADA, or the ADEA. Some employers have argued that, because of such references, discrimination claims should be subject to arbitration under collective bargaining agreements.

At least one federal appellate court (the Fourth Circuit) has required an employee to arbitrate his employment discrimination claim under an arbitration clause contained in a collective bargaining agreement.³ Thus, employers in Virginia, North Carolina, South Carolina, Maryland, and WestVirginia may attempt to require arbitration of such claims. However, courts in the Fourth Circuit may not compel arbitration of such statutory disputes under a collective bargaining agreement unless there is support for such an interpretation in the agreement's language.⁴

The U.S. Court of Appeals for the Seventh Circuit recently ruled that an employee cannot be required to submit his or her statutory employment claim to arbitration under the arbitration clause in a collective bargaining agreement.⁵ In Pryner the court reasoned that an individual's right to proceed in court under federal employment statutes cannot be waived by a union when it executes a collective bargaining agreement. Thus, for companies operating in Wisconsin, Illinois or Indiana, the message is clear - arbitration may be required only under an agreement with each individual employee.⁶ For employers with unionized workforces, this ruling may make it difficult or impossible to implement agreements to arbitrate statutory employment claims since any attempt to negotiate such agreements might violate prohibitions on individual bargaining.

For Wisconsin employers, what is the best way to implement agreements requiring employees to arbitrate employment claims? A variety of methods is available, but the administrative difficulty of obtaining an effective arbitration agreement may dissuade many employers from trying.

Employee handbooks. Simply including an arbitration clause among the provisions of an employee handbook ordinarily will not be sufficient to require employees to arbitrate their employment claims. In a recent Ninth Circuit case, an employee who signed a receipt for the company's handbook providing that he agreed to "read and understand" the handbook, was not required to arbitrate his discrimination claim under the handbook's arbitration clause. The court reasoned that nothing in the receipt form advised the employee that the handbook contained an arbitration clause or that he was waiving his right to proceed in court.⁷

Other recent decisions have required arbitration under employee handbook provisions if steps were taken to bring the arbitration clause to employees' attention. In a recent decision by the Eighth Circuit Court of Appeals, the court required arbitration under a provision set out on the last page of an employee handbook. The arbitration clause had a capitalized and boldfaced heading indicating that it was "important." Moreover, the page containing the arbitration clause was signed by the employee, removed from the handbook and placed in the employee's personnel file. Thus, the court concluded that the arbitration agreement was separate from the employee handbook, which contained a standard disclaimer to the effect that the handbook did not create a contract.⁸

Other courts have enforced arbitration clauses in employee handbooks where the signed receipt clearly indicated that the handbook contained an arbitration clause that the employee agreed to accept as a condition of employment. For example, in one recent case an employee was required to arbitrate her claim where she signed a handbook receipt containing this statement:

"I also understand that as a condition of my employment and continued employment, I agree to submit any complaints to the published process and agree to abide by and accept the final decision of the arbitration panel's ultimate resolution of my complaints for any and all events that arise out of employment or termination of employment."⁹

Whether an employee has effectively agreed to be bound by an arbitration clause is a matter of state contract law. No Wisconsin court has specifically addressed whether an employee handbook arbitration clause is enforceable. However, Wisconsin law appears to be in accord with the general principle that an arbitration clause in an employee handbook, without more, will not be enforced.¹⁰ Accordingly, Wisconsin employers who wish to require arbitration of employment discrimination claims probably should not use an employee handbook as the means for conveying an arbitration agreement to employees, especially if employers want to maintain that nothing in the employee handbook constitutes an enforceable contract.

Employment applications. An alternative method of obtaining an agreement to arbitrate employment-related claims is to set out the arbitration clause in the employment application. The employer's evaluation of the application for employment provides the consideration for the agreement to arbitrate. Under such agreements, employers theoretically may require arbitration of complaints filed by applicants as well as employees. Agreements placed in applications also may solve the dilemma of employers with unions, since most employees do not become union members until 30 to 90 days after hire. However, these issues remain unresolved.

Several recent decisions have required arbitration of employment discrimination claims under provisions in employment applications. For example, an Illinois federal court required two employees who sued their ex-employer for sexual harassment to arbitrate their claims under an arbitration provision included in their employment applications.¹¹ Significantly, the arbitration clause was set out immediately above the signature line on the application. The court concluded that, under Illinois law, the employees had effectively agreed to arbitrate any claims arising out of their employment.

Again, no Wisconsin court has yet decided whether an arbitration provision contained in an employment application will be enforced with respect to an employment discrimination claim. However, the trend of decisions nationwide suggests that as long as the agreement is clearly set forth, so that the signing employee knowingly consents to arbitration, such provisions will be enforced.

Individual employment agreements. In Wisconsin, an arbitration clause contained in a valid individual employment agreement generally will be given effect and preclude an employee from proceeding against his or her employer in state or federal court on claims covered by the arbitration clause.¹² Accordingly, an individual employment agreement is perhaps the best place in which to obtain an employee's agreement to arbitrate claims arising out of his or her employment or termination.

Care should be taken, however, to ensure that the employment agreement itself constitutes a valid and enforceable agreement supported by adequate consideration. Thus, for new employees, employment should be conditioned upon the execution of the employment agreement. For existing employees, continuing employment may not constitute adequate consideration.¹³ Accordingly, independent consideration such as eligibility for a bonus, a raise, or promotion also should be identified in the agreement.

Individual employment agreements may be difficult or impossible to implement for many types of employees. However, with respect to management employees or commissioned salespeople, larger employers often desire individual agreements for other purposes (for example, noncompetition agreements). Such agreements present a clear opportunity to obtain an effective agreement to arbitrate employment-related claims.

Drafting the arbitration clause

Regardless of where an arbitration agreement is placed, the provision's language will determine which claims are subject to arbitration. Accordingly, such provisions should be crafted carefully with the advice of knowledgeable counsel. A few basic guidelines should be followed in most cases.¹⁴

Do not limit substantive statutory rights or remedies. Some employers have been tempted to overreach when drafting arbitration agreements by limiting the remedies employees can recover through arbitration. In a recent guidance, the EEOC took the position that mandating arbitration of Title VII, ADA, and ADEA claims as a condition of employment is "contrary to the fundamental principles evinced in these laws."¹⁵ However, with a few exceptions,¹⁶ the federal courts generally endorse the concept of arbitrating employment disputes as a way of relieving the pressure such cases place on the federal judiciary's docket. Indeed, in a case in which the EEOC attempted to proceed on behalf of employees who had signed arbitration agreements, a federal court dismissed the agency's claims.¹⁷ Thus, so long as an arbitration agreement does not substantively diminish an employee's right to recover under the applicable statute, compulsory arbitration should be upheld.

For example, the EEOC recently filed an amicus brief challenging an employer's attempt to enforce an arbitration clause providing that, regardless of the arbitrator's award, each party was responsible for its own attorney fees. The EEOC unsuccessfully argued that the arbitration clause should not be enforced because it would require employees to forego a substantive right (that is,the right to recover attorney fees under Title VII). The court acknowledged that, if the arbitrator impaired the employee's TitleVII rights, the agreement might be unenforceable, but nonetheless ordered arbitration, holding that it was up to the arbitrator to interpret the agreement. ¹⁸ Other provisions that have drawn challenges include limitations on the right to consult or employ counsel, clauses naming arbitrators employed by the company, provisions requiring employees to pay the costs of arbitration, limitations on the type or amount of damages available, provisions denying any and all discovery, and language imposing far shorter deadlines than provided by statute. ¹⁹

To avoid such difficulties, arbitration clauses should not impinge upon any substantive rights provided by applicable statutes. Language expressly providing that the arbitration clause does not prevent employees from consulting counsel, or from filing an administrative complaint, will help minimize challenges to arbitration provisions. The American Arbitration Association's "National Rules for the Resolution of Employment Disputes" incorporate many of these principles. ²⁰

The agreement should be drafted broadly so that all claims are covered. Some employers' efforts to require arbitration of employment claims have been frustrated by narrowly drafted arbitration clauses. For example, one employer's effort to compel arbitration was challenged when the arbitration clause only covered disputes over performance of the employment agreement, and did not specifically extend to any other claims.²¹ Similarly, another employer was denied arbitration where the arbitration clause failed to provide that any statutory claims would be subject to arbitration. ²²

It is impossible to anticipate all of the potential claims that employees may assert. Accordingly, an arbitration clause should encompass all claims arising out of an employee's employment or termination, regardless of whether such claims are contractual, statutory, common law or based upon any other legal theory. Perhaps the broadest arbitration agreement would cover all disputes whatsoever between the employer and the employee.

The various statutes under which employees often bring claims should be identified specifically so as to subject such claims to arbitration. TitleVII, the EPA, the ADA, the ADEA, and the FMLA should be mentioned. Comparable state laws also can be identified (for example, WFEA and Chapter 109 of the Wisconsin Statutes). Other common theories of employer liability can be mentioned specifically or covered by "catch-all" language. For example, courts have subjected claims of public policy wrongful discharge and whistleblower protection violations to arbitration under broadly worded arbitration clauses. ²³

The agreement should provide that any arbitration award is "final and binding." At least one employer has arbitrated a claim successfully only to discover that the employee could proceed in court under the same theories.²⁴ In that case, the arbitration clause did not expressly provide that it was the exclusive forum for such claims or that arbitration awards were final or binding. Accordingly, arbitration agreements should state that arbitration is the exclusive means by which such claims may be resolved and that arbitration awards shall be final and binding.

Do not refer to statutory arbitration provisions. At least one Wisconsin employer has included language in an employee's arbitration agreement to the effect that arbitration may be compelled under the Wisconsin Arbitration Act (Chapter 788 of the Wisconsin Statutes). However, section788.01 expressly precludes the enforcement of "contracts between employers and employees" under the Act. Accordingly, no arbitration agreement between an employer and employee should identify the Wisconsin Arbitration Act as an enforcement mechanism.

The Federal Arbitration Act (FAA) ²⁵ can provide a statutory mechanism for enforcing arbitration agreements. However, it too contains some pitfalls. For example, employees have challenged efforts to enforce arbitration clauses under the FAA, arguing that its exclusion of "contracts of employment of ... workers engaged in foreign or interstate commerce" bars the enforcement of most contracts between employers and employees. While this argument has been rejected by the Seventh Circuit and most federal courts, it has not been finally settled by the U.S. Supreme Court and continues to be raised by employees opposing arbitration. ²⁶

Accordingly, practitioners are well advised not to make reference to any statutory enforcement scheme when drafting arbitration agreements between employers and employees. Instead, such agreements should provide that they may be enforced by injunctive relief requiring specific performance of the obligation to arbitrate, and that arbitration awards shall be final, binding and enforceable.

Conclusion

Arbitration offers employers an opportunity to reduce the costs associated with employment claims. However, an arbitration agreement will be effective only if the employee knowingly waives his or her right to proceed in court. Moreover, an arbitration agreement that attempts to diminish employees' remedies under state or federal employment law may not be enforced. Accordingly, employers must be careful to place such agreements in prominent positions in the documents signed by employees, and to draft them so as to cover desired claims without impinging upon substantive employee rights.

Endnotes

¹See DiCesare, Alternative Dispute Resolution, Monthly Lb. Rev., Jan. 1996, at 79.

² Pryner v. Tractor Supply Co., 109 F.3d 354 (7th Cir.),cert. denied, 118 S. Ct. 295 (1997)(declining to compel arbitration of Title VII, ADA and ADEA claims under collective bargaining agreement);Peacock v. Great Western Mortgage Corp., 110 F.3d 222 (3d Cir.), cert. denied, 118 S. Ct. 299 (1997)(requiring arbitration of sexual harassment claim);DeMeo v. Smith Barney Inc., cert. denied, 118 S. Ct. 329 (1997)(refusing to suspend arbitration of age discrimination claim of securities industry employee).

³ Austin v. Owens-Brockway Glass Container Inc., 78 F.3d 875 (4thCir.), cert. denied, 117 S. Ct. 432 (1996).

⁴ Brown v. Trans World Airlines, 74 FEP Cases 1675 (4th Cir. 1997) (BNA).

⁵Pryner v. Tractor Supply Co., 109 F.3d 354 (7th Cir.), cert. denied, 118 S. Ct. 295 (1997).

⁶ The U.S. Supreme Court may modify this rule in a case recently accepted for review in which the district court compelled arbitration of an ADA claim under a collective bargaining agreement and the appellate court affirmed. See Wright v. Universal Maritime, 121 F.3d 702 (4th Cir. 1997), cert. granted, __ S. Ct. __, 66 U.S.L.W. 3399 (March 2, 1998).

⁷ Nelson v. Cyprus Bagdad Copper Corp., 119 F.3d 756 (9th Cir. 1997).

⁸Patterson v. Tenet Healthcare Inc., 113 F.3d 832 (8th Cir. 1997).

⁹ O'Neil v. Hilton Head Hosp., 115 F.3d 272 (4th Cir. 1997). See also, Topf v. Warnaco Inc., 942 F. Supp. 762 (D. Conn. 1996).

¹⁰ See Clay v. Horton Mfg. Co. Inc., 172 Wis. 2d 349, 493 N.W.2d 379 (Ct. App. 1992)(holding that an employee handbook alone does not constitute an enforceable contract).

¹¹ Sheller v. Frank's Nursery & Crafts Inc., 957 F. Supp. 150 (N.D. Ill. 1997). See also, Cole v. Burns Int'l Sec. Serv., 105 F.3d 1465 (D.C. Cir. 1997); Brown v. KFC Nat'l Mgmt. Co., 921 P.2d 146 (Haw. 1996).

¹² Bungard v. Rural Mut. Ins. Co., 1995 WL 215500 (Ct. App. 1995)(unpublished decision).

¹³ NBZ Inc. v. Pilarski, 185 Wis. 2d 827, 520 N.W.2d 93 (Ct. App. 1994).

¹⁴ For additional discussion of other jurisdictions, see Andrew W. Volin, Recent Developments in the Arbitration of Employment Claims, 52 Disp. Resol. J. 16 (Summer 1997).

¹⁵ EEOC Notice 915.002 (July 10, 1997).

¹⁶ See, e.g., Rosenberg v. Merrill Lynch, 1998 U.S. Dist. Lexis 877 (D. Mass. 1998).

¹⁷EEOC v. Kidder, Peabody & Co., 74 FEP Cases 1833 (S.D.N.Y. 1997).

¹⁸Johnson v. Hubbard Broad. Inc., 940 F. Supp. 1447 (D. Minn. 1996).

¹⁹ See EEOC Notice 915.002 (July 10, 1997) n.18.

²⁰ The rules are available through the American Arbitration Association Internet site, or by calling (800) 671-2678.

²¹ Bungard v. Rural Mut. Ins. Co., 1995 WL 215500 (Ct. App. 1995) (unpublished decision).

²² Rudolph v. Alamo Rent-A-Car Inc., 952 F. Supp. 311 (E.D. Va. 1997).

²³ See Oldroyd v. Elmira Sav. Bank FSB, 1998 WL11056 (2d Cir. 1998); In re Prudential Ins. Co. of America Sales Practice Litig. All Agent Actions, 1998 WL 2844 (3d Cir. 1998).

²⁴Orlando v. Interstate Const. Corp., 1996 WL 638211 (3d Cir. 1996).

²⁵ 9 U.S.C. §§ 1-14.

²⁶ Miller Brewing Co. v. Brewery Workers Local Union No. 9, 739 F.2d 1115, 1162 (7th Cir.), cert. denied, 469 U.S. 1160 (1984).

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