Mutual Agreement to Arbitrate Claims: What Is It?

A mutual agreement to arbitrate claims is a common form of dispute resolution outside of the public court system.

Voluntary arbitration agreements have been used for many years to successfully resolve commercial disputes. For employees covered by a collective bargaining agreement, arbitration is often the end result of a grievance process that occurs between management and the union. Commercial and union disputes generally involve private arbitrators who are experienced within the particular business environment that they are arbitrating and are able to provide fair resolution within the voluntary arbitration process.

More and more employers are now utilizing forced arbitration to place conditions on the terms of initial or continued employment. Employers also use them in regard to important benefits within the employment agreement. This limits the employee’s future ability to make any claims in court against the employer in relation to these conditions.

Is Forced Arbitration Legal?

In response to various court decisions that maintained that arbitration agreements were unenforceable, the Federal Arbitration Act (FAA) was passed in 1925. In accordance with this law, arbitration agreements are largely valid and enforceable. However, if an arbitration agreement violates the general law of contracts as applied to all contracts that fall under the law of the state governing the agreement, then said arbitration agreement is not enforceable. This is the major exception to the provision of the Federal Arbitration Act.

In 2001, the U.S. Supreme Court determined that the Federal Arbitration Act broadly applies to employment contracts. Since this decision, forced arbitration employment agreements have increased in usage, as have the decisions enforcing those agreements against employees. However, it is state contract law that governs whether or not an arbitration agreement is enforceable, depending on the facts of the case or the contract itself.

Ideally, in order to consider an arbitration agreement valid and enforceable under the concepts of contract law, both parties should get something of value in exchange for something else of value. Not all courts enforce this.

The concept that a contract must contain reciprocal promises instead of being completely one-sided is a basic element of contract law. However, many courts do not enforce this rule in the arbitration, stating that there is no "mutuality" requirement for arbitration agreements.

How Does Forced Arbitration Affect the Employee?

An employee is not legally required to accept arbitration for dispute resolution of claims that could be presented in public court. However, employers often leverage benefits such as job security by encouraging claims submissions through arbitration instead of taking the legal route. This is a significant loss to an employee’s rights.

The decisions of a court are open to appeal and to public scrutiny. Employees are also afforded some protection within the public court system where a claim would also be heard by a judge who is well-versed in any number complex labor laws that may have been violated by the employer. Filing claims through public court allows access to discovery, which means information that is held by the employer must be made accessible. In public court, discovery is without limitation.

Forced arbitration leans toward the benefit of the employer. It allows a company that violates employee protection laws to continue doing so without holding them accountable for these violations, particularly since employees who have signed such agreements avoid filing claims for fear of losing their job or certain benefits.

A job may depend on the provisions laid out in a forced arbitration agreement. This leaves an employee only the options of agreeing to the conditions or refusing to take or keep a job. If a worker has been employed for several years and recently been asked to sign a forced arbitration agreement, has noticed a forced arbitration agreement within the onboarding documentation of a new job, or believe they have grounds to sue their employer but are subject to a forced arbitration agreement, it may be best for that employee to consult with an experienced attorney to determine their rights and potentially negotiate a better agreement.

What Are the Legal Limitations of Forced Arbitration?

The legal limitations of forced arbitration are still a work in progress and depend on the state court system and area of the country that the agreement is being tested. Some courts have embraced the practice of forced arbitration while others are skeptical of enforcing such agreements against unwilling employees.

Dealing with Discrimination

It is important to note that an arbitration agreement pertains only to the employee. If an employer discriminates against the employee, the employee can still make a complaint by contacting a government agency such as the Equal Employment Opportunity Commission (EEOC). The agency can file a suit in court on behalf of the employee in order to enforce the law. This is not considered a breach of the employee’s agreement with their employer.

The Pros and Cons of Arbitration

As with all processes, there are both positives and negatives involved. The advantages of arbitration include:

  • An informal process that can make things easier for all involved
  • Faster resolution than court claims, which can take several years from beginning to end

For an employee, the disadvantages to arbitration tend to be greater and include:

  • A claim is heard by an arbitrator who is a private citizen, usually a retired judge
  • Arbitrator is paid by one or both parties to listen to the evidence presented and determine a fair outcome
  • No jury of peers who usually tend to be more sympathetic toward the employee.

Arbitration cannot be appealed in most cases, which means the awards are more final than a court’s verdict, though they may not be fair.

The arbitration process usually places limits on discovery, which is the information each side can obtain from the other. The employer often has the most information pertaining to the employee’s case but is not bound to share it beyond the limitations stated. Discovery can include information on:

  • Employer policies
  • Investigations
  • Pay and benefits

Courts are more likely to strike down a discovery limitation, particularly the prohibition of depositions.

Negotiating a Fair Agreement

An employee or potential employee has the right to refuse to sign an employment contract with which they are not comfortable. However, it puts the employee at risk of losing their job. If an employer won’t let an employee outright refuse to sign the document, it could allow the employee an opportunity to negotiate terms that are more beneficial to them. This is a similar process to discussing salary or benefits compensation. An employer may refuse, but it is in the employee’s best interest to attempt this negotiation in order to protect themselves. Legal consultation can help ensure the fair negotiation of terms.

Negotiating the Terms of an Arbitration

While the arbitration process tends to lean toward the favor of the employer, there are some provisions that can be negotiated to make it more balanced for both parties. These include:

  • the right to recommend an arbitrator,
  • the right to reject at least one arbitrator that has been suggested,
  • disclosure of information about the arbitrator in order to avoid bias,
  • the distribution of arbitration costs,
  • the right to representation by an attorney (both parties should have legal counsel present at all times throughout the arbitration process), and
  • the right to all the remedies that would have been available had the claim been filed in public court.

Avoiding Arbitrator Bias

An arbitrator should be an individual, neutral party. Both an employee and an employer should have the right to refuse an arbitrator with a conflict of interest, such as a shareholder of the company, or who shows any other kind of bias toward one side or the other. Though bias may not be easy to prove, courts are extremely sensitive to the area of unconscionability when it comes to the selection of an arbitrator.

Be aware of employers who use agency-supplied arbitrators. This can influence a court’s decision over whether or not an agreement is enforceable. If the arbitrator used is from an agency that considers the employer to be a client, the arbitrator stands to make money from their continued business.

What Are Procedural and Substantive Unconscionability?

Procedural unconscionability addresses how an arbitration agreement was formed while substantive unconscionability takes into consideration the fairness of the arbitration process under the forced arbitration agreement in comparison to what an employee would normally have access to within the public court system.

In order to determine whether an arbitration agreement is procedurally unconscionable, courts will consider:

  • the amount of time given to an employee to review and consider the agreement,
  • whether an employee was permitted legal counsel to discuss the rights they were giving up by agreeing to such a provision,
  • whether the employee was threatened with the loss of a job or the denial of an important employee benefit,
  • whether the employee was informed that a particular form was not important and was discouraged from reading the document in its entirety prior to signing it, and/or
  • whether the agreement was inconspicuously located within the document.

To determine the substantive unconscionability of an agreement, the court takes into consideration the following factors:

  • the cost of arbitration to the employee,
  • any limitations on the relief the employee is entitled to through arbitration process versus filing a claim in public court,
  • the mutuality of the agreement and whether both the employer and the employee are bound to arbitrate their claims,
  • any limitations on methods used to obtain evidence which would otherwise be available to the employee through public court,
  • any justifications for one-sided results, and
  • the overall imbalance in the obligations imposed.

Courts have generally been critical in regard to any limitations on the relief that would otherwise be available through public court. As such, most forced arbitration agreements specify that there are no limitations on claims or damages that can be received by the employee.

Furthermore, high costs imposed on an employee may render an arbitration agreement unenforceable, although there is no fixed dollar amount that is considered too high to force an employee to pay. It is up to the court to determine what may be unreasonable for a particular employee to pay, thereby potentially rendering the agreement unenforceable. To avoid this potential issue, enforced agreements usually do not require an employee to pay more than they would normally incur through the public court process.

Read All Documentation Carefully

Many employers are forthcoming with their expectations of their employees at the time of hiring. Others may bury forced arbitration agreements within various types of employment documentation. To avoid unwittingly giving up any rights, an employee should be sure to read all documents carefully, no matter how long they may be. This includes:

  • Employment contracts
  • Employment letters
  • Employee handbooks
  • Acknowledgement forms

An employee should watch out for forced arbitration agreements within these documents. An employee should never sign a form acknowledging that they have read a particular document or agreed to a particular clause if they have not indeed read the document or are unaware of the details of the particular clause. While forced arbitration agreements may not seem important now, they could cause you trouble in the future.

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