Rethinking Employment Law Strategies - Part 2

Handbook Acknowledgment Forms

Many courts have compelled arbitration under provisions contained in broadly distributed documents.

One circuit court of appeals enforced an arbitration provision in an employee handbook and referenced in a handbook acknowledgment form. The provision was enforceable although the acknowledgment form contained a broad disclaimer. A federal court in South Carolina reached the same result in a similar case.

A Florida case ordered arbitration because the acknowledgment form for the company handbook, signed by the plaintiff, contained an express agreement to use an arbitration process.

A Kansas federal court required arbitration of claims for violation of federal and state statutory and common law claims based on a dispute resolution policy the employer distributed at a meeting attended by the plaintiff. The policy said that mediation/arbitration by a neutral third party was the required and final means for the resolution of any serious disagreements and problems not resolved by an internal dispute resolution process. The policy also said that it was not a guarantee employment would continue for any specified period and nothing limited the “at will” status of the employees. The employee argued the arbitration policy was not enforceable because it was not part of a written employment contract.

The Court concluded the employee was employed under a contract of “at will” employment and that a term was the arbitration provision. The district court relied on state law permitting employees to assert claims for breach of contract based on policies published by employers. The Court concluded that the arbitration policy created a contractual duty.

Offer Letters If an employer uses offer letters for hiring new employees, this document offers another opportunity for documenting the employee's agreement to an arbitration clause. Of course, the arbitration provision could be part of the letter itself. It is, however, also possible to use language in an offer letter to make case separately stated arbitration provision binding.

For instance, a federal court ordered arbitration based on an arbitration policy in an employee handbook, because an offer letter, which the employee had signed under the phrase “accepted to and agreed to,” noted that general terms of employment were stated in the handbook The handbook said any controversy arising out of the employment relationship would be submitted to final and binding arbitration. The employee also signed an acknowledgement of receipt for the handbook. The form said the handbook was not intended to be a contract, except that the handbook was the entire agreement on the right to arbitrate employment disputes. The employee argued there was no agreement to arbitrate. The Court ruled that the offer letter incorporated the handbook, and the acknowledgement form clearly said that the handbook was not a contract except the arbitration provision.

The Scope Problem Another aspect to whether consent is informed and voluntary centers on the scope of the arbitration provision itself. The more broad the arbitration provision is worded, the easier it is to require arbitration. This is strategically important where employees or former employees are represented by counsel. A narrowly worded arbitration scope provision creates an invitation for opposing counsel to make claims which are designed to get around the arbitration provision.

If properly worded, courts have held that even tort claims can come within the scope of an arbitration provision. However, even a broad provision will not require arbitration of claims by nonemployee spouses. If it is possible that spouses may allege that representations were made to them, employers should require the spouse to sign any agreement provided to the employee.

In a Colorado case, an employee signed a stock option agreement that required arbitration of any dispute that arose directly or indirectly concerning the Plan, the Option, the Optionee's employment or the end of the Optionee's employment, whether arising in contract, statute, tort, fraud, misrepresentation or other legal theory. The Court held this provision covered claims unrelated to the stock option agreement itself for breach of contract, retaliatory discharge, wrongful discharge, defamation, outrageous conduct and racial discrimination. The provision was also ruled broad enough to cover claims against individual defendants since they were acting as agents or employees of the employer.

On the other hand, a Virginia Court refused to order arbitration of statutory claims because the arbitration provision said it applied to claims involving an employee handbook, and the handbook did not mention statutory rights. In BRENNAN v. KING,58 an assistant professor at Northeastern University sued for breach of contract and violation of federal and state antidiscrimination laws. The Court ruled that the professor was required to arbitrate the breach of contract claim but not the other claims. The University had a complex and multitracked arbitration system under which some issues could be fully resolved (the contract claims) and others where the arbitrator's authority was limited to procedural issues and arbitration was not designated as the exclusive means of dispute resolution. For tenure decisions, all the arbitrator was empowered to do was require the Provost to transmit to the President the Standing Appeals Committee's positive recommendation instead of the Provost's own. Both the President and the Board of Trustees remain entirely free to disregard the favorable Appeals Committee recommendation forwarded by the Provost pursuant to the arbitrator's directive. Consequently, the President receives nothing more than a recommendation, not a conclusive determination. Also the handbook said only that the employee had a right to request arbitration. The Court found that the arbitral procedure was an option that a candidate could invoke or not and, if invoked, had a very limited horizon. The presumption of arbitrability was overcome by the terms of the contract.

A recent decision by the Supreme Court of New Jersey ruled that because an arbitration provision in an employment agreement which was ambiguous with respect to whether statutory claims under its law against discrimination were to be arbitrated, the former employee had a right to pursue those claims in a court action. The Court at the same time specifically stated that it was affirming the well settled rule in New Jersey that statutory claims could be subjected to arbitration including, specifically, claims under the law against discrimination. While not requiring a list of “every imaginable statute by name” in order to be a knowing and effective voluntary waiver of rights, the provision should at least provide that the employee agrees to arbitrate all statutory claims arising out of the employment relationship and its termination. Citing previous New Jersey decisions, the Court noted that the provision should reflect the employee's general understanding of the types of claims included, like “workplace discrimination claims”.

A federal court in New York ordered arbitration of claims that arose after the employment had been terminated because the provision was broad enough to include such claims in its scope. The arbitration provision required arbitration of disputes arising out of employment or termination of employment. The Court said this was broad enough to cover claims of defamation, breach of contract, tort and fraud about the employer's posttermination communications to third parties about the former employee.

To ensure knowing consent, employers should:

Make sure employees are aware of the new policy. A signed acknowledgment form which says they read and understand the policy eliminates disputes.

Make sure it is understood.

The arbitration agreement should be separately stated and distributed even if included in a handbook.

Distribute both the arbitration policy and any procedural rules to each employee.

Encourage employees to read the materials.

Make sure the arbitration provisions are simply stated, with a summary emphasizing that jury trials are waived. Explicitly provide that all claims arising out of or relating to the employee's employment or its end must be arbitrated.

Provide time for employees to read and question the provisions.

Make it mutual, including any exclusions.

THE RIGHT TO REPRESENTATION Employers considering mandatory arbitration policies must understand that employee advocates are hostile to them. The EEOC believes that predispute mandatory arbitration agreements are contrary to federal law. The Office of the General Counsel of the National Labor Relations Board has advised that unfair labor practice charges should be issued against an employer that required employees to sign a mandatory arbitration provision and fired an employee who refused to sign. Even the Massachusetts Commission Against Discrimination has held that it will not necessarily recognize decisions issued under predispute arbitration policies though it has its own arbitration program. Lawyers who represent employees see these policies as a threat, and are likely to challenge the enforceability of mandatory arbitration provisions.

Although there does not appear to be a specific case where an employer issued an arbitration policy which denied employees the right to representation, given the scrutiny these policies will be subjected to and the standards used to review them, clearly such a policy would not likely be enforced.

Indeed, the major “standard” for employment arbitration provisions, the DUE PROCESS PROTOCOL FOR MEDIATION AND ARBITRATION OF STATUTORY DISPUTES ARISING OUT OF THE EMPLOYMENT RELATIONSHIP (“Protocol”) issued by the American Arbitration Association (AAA), the leading forum for employment and labor dispute resolution,64 requires that employees should have the right to be represented by a spokesperson of their own choosing that the procedure should so specify and should include reference to institutions which might offer assistance, such as bar associations, legal service associations, civil rights organizations, trade unions, etc.

Likewise, the AAA NATIONAL RULES FOR THE RESOLUTION OF EMPLOYMENT DISPUTES (“AAA Rules”) states that any party may be represented by counsel or other authorized representative and that for parties without representation the Association will, upon request, provide reference to institutions which might offer assistance.

NEUTRAL DECISIONMAKERS Although the Supreme Court's decision in GILMER and the plaintiff's argument that arbitration panels of the New York Stock Exchange, or arbitrators generally, are inherently biased, this is not a closed issue. In CHENGCANINDIN v. RENAISSANCE HOTEL ASSOCIATES,66 a California Court of Appeal denied an employer's motion to compel an employee to bring her wrongful discharge claim before its review board under a contractual ADR program. The Court held that the procedure was not arbitration, and that the employer was not entitled to compel participation.

The process there was a review board consisting of hotel employees and chaired by a personnel department employee. Tie votes were broken by the hotel's general manager. The Court said this was not impartial because everyone involved in the process was employed by, selected by, and under the control of the Hotel. In addition, this employer had the authority to decide which claims came within the jurisdiction of the system, the system discouraged employees from using counsel, and the system allowed management to set rules unilaterally regarding evidence.

The Court concluded that a dispute resolution procedure cannot be considered an arbitration unless there is a thirdparty decision maker, a final and binding decision, and a mechanism to assure a minimum level of impartiality.

Again, given the standards developed, simply having an “external” procedure may not be good enough when the arbitration policy is challenged by counsel representing an employee or applicant. The AAA Rules provide that arbitrators serving under them must (1) be experienced in the field of employment law; (2) have no personal or financial interest in the results of the proceedings in which they are appointed; and (3) have no relation to the underlying dispute or to the parties or their counsel that may create an appearance of bias. The AAA Rules further require that the roster of available arbitrators be established on a nondiscriminatory basis, diverse by gender, ethnicity, background and qualifications and that before accepting appointment, the prospective arbitrator must reveal all information that might be relevant to the standards of neutrality including but not limited to service as a neutral in any past or pending case involving any of the parties and/or their representatives or that may prevent a prompt hearing.

Likewise, the Protocol requires that arbitrators selected for such cases should have skill in the conduct of hearings, knowledge of the statutory issues at stake in the dispute, and familiarity with the workplace and employment environment. The roster of available mediators and arbitrators should be established on a nondiscriminatory basis, diverse by gender, ethnicity, background, experience, etc. to satisfy the parties that their interest and objectives will be respected and fully considered and be independent of bias toward either party. The Protocol also anticipates that arbitrators are trained in the statutes, including substantive, procedural and remedial issues to be confronted and due process and fairness in the conduct and control of arbitration hearings with training provided by government agencies, bar associations, academic institutions, etc., administered perhaps by the designating agency, such as the AAA, be updated periodically and be required of all arbitrators.

Employers can specify eligibility requirements for the arbitrator selected, such as being a lawyer, having several years of experience in the employer's industry, or being a member of or sanctioned by highly regarded organizations such as the AAA or another association which has qualifying standards for inclusion which meet the Protocol and AAA Rules requirements.

None of this means that there is no role for internal dispute resolution systems. Just the opposite is true. Many employers have “open door” or other policies where employees can bring problems to management attention. These policies give employees and management an opportunity to work out issues and head off litigation. The problem comes when attempting to make an internal process the final, binding, mandatory route for resolving all disputes including statutory rights.

A leading case on this point is the decision by the Massachusetts Supreme Judicial Court in O'BRIEN v. NEW ENGLAND TELEPHONE & TELEGRAPH COMPANY. The Court reversed a jury verdict in favor of an employee for breach of contract because the employee had not used the grievance procedure in the personnel manual. Relying on federal case law requiring an exhaustion of the grievance process in collective bargaining agreements, the Court adopted a similar rule for claims for breach of contract based upon personnel manuals that also contain a grievance procedure.

A Utah court dismissed claims for breach of contract and wrongful discharge violating public policy because the employee had not exhausted the employer's internal grievance system. Focusing on the employee's claim that he was constructively discharged, the Court noted that it was unreasonable for the employee to feel he had no choice but to resign when his grievance had not been fully processed.

Following O'BRIEN, in ROSA v. POLAROID CORP.,71 a Superior Court dismissed a former employee's claim that the employer breached its contract with her by failing to issue annual performance reviews pursuant to its personnel policies and practices because she never filed a grievance with the employer for its failure to issue a performance review. The same result happened in BRENNAN v. KING,72 where the Court affirmed a summary judgment for the employer on contract claims ruling that the employee was required to pursue the grievance procedure outlined in his contract of employment before maintaining suit for breach of the employment contract.

What applies to the goose applies to the gander. In FRONTERA v. CITY OF SOMERVILLE,74 the Appellate Division of the Massachusetts District Court ruled that an employee was allowed to pursue litigation in court because the employer failed to follow the grievance procedure which obligated the department head, to meet with the employee and her union representative before rendering a written decision. The Court found that this was a repudiation of the grievance procedure by the employer.

In addition, there are other approaches. Although mandatory, binding arbitration is the most common and most controversial approach, mandatory procedures such as those at Brown & Root Inc., Masco Corp. and Metallgesellschaft Corp., often incorporate a multistep ADR procedure to ensure that many problems will be resolved well before arbitration.

Some large employers have adopted variations on this theme to resolve workplace disputes. For example, Hughes Aircraft Co. and Eaton Corp., among others, offer voluntary, binding arbitration as an option available to employees. Because of the voluntariness of the employee's participation in this process, after a dispute has arisen, there is little question as to its enforceability.

Other large employers, such as Texaco Inc. and TRW Inc., have multistep workplace ADR systems with mandatory predispute arbitration procedures, the results of which are binding on the employer, but not the employee. While the employee is required to submit to arbitration before going to court, an arbitration decision against the employee would only be binding if accepted. This process gives both sides the ultimate education into the strengths and weaknesses of their respective cases, and should help resolution short of a court proceeding.

Internal dispute resolution procedures are helpful even if they do not preclude subsequent litigation. Where an employee's discharge had been upheld through an internal dispute resolution procedure and he sued for breach of contract, the Court concluded the employee could bring his claim in court, but restricted its inquiry on the breach of contract claim to whether the internal procedure was followed; not whether there had been just cause for the discharge. Finding that the internal grievance procedure had been followed, the Court granted summary judgment to the employer on the breach of contract claim.

Although internal systems may not preclude an employee from bringing a court action, they are valuable for other reasons. They can alert employers to mistaken disciplinary decisions relatively quickly and cheaply, allowing an early chance for correction. They can also demonstrate if the employer's definition of fairness is agreed to by employees. Finally, they can change the scope of a court's inquiry to whether the internal grievance procedures were followed.

STATUTORY REMEDIES First, employers need to understand that whether a mandatory arbitration procedure for employment disputes can substitute for and prevent the filing of complaints with administrative agencies such as the Equal Employment Opportunity Commission (EEOC) or corollary state agencies is a very open one. Employers deciding to impose mandatory arbitration procedures should operate on the assumption that those procedures will not prevent the filing of complaints with administrative agencies and will only prevent the filing of court actions by the employee or former employee only after there has been a determination by the administrative agency.

For example, in E.E.O.C. v. WAFFLE HOUSE, INC., an employee who was fired after he had a seizure at work filed a charge with the EEOC complaining that his firing violated the Americans with Disabilities Act. The EEOC sued the employer. The employer filed a petition under the Federal Arbitration Act to compel arbitration and stay the litigation and, alternatively, to dismiss the action. The Fourth Circuit Court of Appeals held that: (1) arbitration agreement in employment application governed employment relationship with employer; (2) in prosecuting a suit in its own name, the EEOC could not be compelled, by reason of the arbitration agreement, to arbitrate its claims; (3) arbitration agreement precluded EEOC's pursuit in court of individual remedies of backpay, reinstatement, and compensatory and punitive damages, although it could seek broad injunctive relief in its public enforcement role. The Supreme Court has decided to hear this case.

In its GILMER decision, the Supreme Court noted that arbitration arguments are not relevant defenses before the EEOC. An individual subject to an arbitration agreement will still be free to file a charge with the EEOC, though the claimant is not able to begin a private judicial action. In a prior decision, ALEXANDER v. GARDNERDENVER CO. , which upheld an arbitration provision, the Court noted that the resolution of statutory or constitutional issues is a primary responsibility of courts, and judicial construction has proved especially necessary with respect to Title VII, whose broad language frequently can be given meaning only by reference to public law concepts.

The EEOC has said that agreements that mandate binding arbitration of discrimination claims as a condition of employment are contrary to the fundamental principles shown in these laws. In its Policy Statement on Mandatory Binding Arbitration of Employment Discrimination Disputes as a Condition of Employment the EEOC said that the use of unilaterally imposed agreements mandating binding arbitration of employment discrimination disputes as a condition of employment harms both the individual civil rights claimant and the public interest in eradicating discrimination. Those whom the law seeks to regulate should not be allowed to exempt themselves from federal enforcement of civil rights laws. Nor should they be allowed to deprive civil rights claimants of the choice to vindicate their statutory rights in the courts an avenue of redress decided by Congress to be essential to enforcement. As a result, the EEOC has ordered its field offices that charges should be taken and processed in conformity with priority charge processing procedures despite whether the charging party has agreed to arbitrate employment disputes. The offices are instructed to closely scrutinize each charge involving an arbitration agreement to decide whether the agreement was secured under coercive circumstances (e.g., as a condition of employment). The EEOC will process a charge and sue, in appropriate cases, despite the charging party’s agreement to arbitrate. Pursuant to its National Enforcement Plan, the EEOC will continue to challenge the legality of specific agreements that mandate binding arbitration of employment discrimination disputes as a condition of employment.

Likewise, in Massachusetts the Massachusetts Commission Against Discrimination (MCAD) has provided that when, pursuant to an employment contract, an aggrieved person enters grievance proceedings concerning the alleged discriminatory act(s) within six months of the conduct complained of, the person may file a complaint with the MCAD within six months of the outcome of such proceeding(s)83. The Commission's Rules also provide that no waiver agreement signed by any individual shall affect the Commission’s right and statutory duty to enforce G.L. c. 151B, G.L. c. 151C, and G.L. c. 272 §98, or to investigate any complaint filed before it.

Even if the decisionmaker is neutral, an employer cannot limit the substantive protections of an employment rights statute, such as the remedies available and the statute of limitations, as part of the arbitral process. In STIRLEN v. SUPERCUTS INC.,85 California's Court of Appeal upheld the denial of an employer's motion to compel arbitration, finding that the agreement was unconscionable because, among other things, the arbitration clause provided that the available remedies were restricted to a money award not to exceed the amount of actual damages for breach of contract, less any proper offset for mitigation of such damages. The parties were not entitled to any other money damages, specific performance or injunctive relief. In addition, the employee was subject to a oneyear statute of limitations that could not be tolled, even if a longer period would ordinarily apply in court. The Court found that these provisions deprived employees of significant rights and remedies they would normally enjoy.

This does not mean that every deviation from every remedy designated by a statute will create a blanket refusal to enforce an agreement to arbitrate. In DEGAETANO v. SMITHBARNEY INC.,86 the Court compelled arbitration of a discrimination claim although the procedure precluded some remedies, like injunctive relief, attorney fees and punitive damages. According to the Court, the mere fact that some statutory remedies may be unavailable in arbitration does not establish that Title VII claims must be resolved in a court of law.

In ARMENDARIZ v. FOUNDATION HEALTH PSYCHCARE SERVICES, INC. , the plaintiffs argued that the agreement to arbitrate disputes with the former employer was forced on them as a condition of employment, restricted their rights to a jury trial and other remedies, and was a violation of public policy. The two employees said they were fired after being sexually harassed and discriminated against because of their sexual orientation. Their claims were based on the state’s version of the federal Civil Rights Act. The employer moved for an order to compel arbitration. The clause required the employee to arbitrate any claim of wrongful firing. It limited the remedy to a sum equal to the wages they would have earned from discharge up to the date of an arbitration award. The Court said that in agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute but only submits to their resolution in an arbitral forum. Arbitration agreements that include unwaivable statutory rights must be subject to scrutiny to insure that the process by which the rights are vindicated is fair. The Court refused to mandate arbitration because, for the agreement to pass muster, all remedies that would be available in court must be allowed.

A federal court in New Mexico refused to order arbitration of an ADEA claim because the arbitration provision said the arbitrator was only authorized to award damages for breach of contract. The Court concluded that by limiting the kind of damages an arbitrator could award, the employer had chosen to exclude statutory claims from the scope of the arbitration provision.

Many courts have held that an arbitration agreement may not prohibit remedies like punitive damages and attorney fees or otherwise be inconsistent with the statutory claim that is the subject of a demand for arbitration. This phenomenon is not limited to employment matters. For example, in GRAHAM OIL CO. v. ARCO PRODUCTS CO.,88 a case involving an arbitration clause in a franchise agreement, the 9th U.S Circuit Court of Appeals refused to compel arbitration where the clause eliminated the right to recover punitive or exemplary damages and attorney fees and reduced the statute of limitations from one year to days.

FEES It has been found that fee splitting can make an arbitration agreement unenforceable where the arbitration fees and costs are so prohibitive as to effectively deny the employee access to the arbitral forum. The big issue analyzed by the courts on this question is not whether arbitration costs can be so high when imposed on an employee so as to make an arbitration requirement unconscionable. There is practically unanimous agreement that they can. The question has been whether courts should apply a casebycase basis inquiry in deciding this, or a broad per se rule against all feesplitting despite the circumstances in each case.

In COLE v. BURNS INTERNATIONAL SECURITY SERVICES,90 the D.C. Circuit held that when the arbitration process imposes costs not found in the court system, specifically, the cost of arbitrator compensation, an arbitration clause would not be enforceable. The Court found that since the system of mandatory employment arbitration was imposed by the employer, the arbitrator's fees, according to public policy as construed by this court, should be borne solely by the employer.

The Tenth Circuit Court of Appeals, in SHANKLE v. BG MAINTENANCE MGMT. OF COLORADO, INC. , relied on the COLE decision to hold an arbitration agreement unenforceable because of a mandatory feesplitting provision. The Court said that the Agreement placed the employee between a rock and a hard place. It prohibited use of the judicial forum, where a litigant is not required to pay for a judge's services, and the prohibitive cost limited use of the arbitral forum.

Several courts have refused to conclude that fee splitting necessarily makes an arbitration provision unenforceable. For instance, in BRADFORD v. ROCKWELL SEMICONDUCTOR SYSTEMS, INCORPORATED , a former employee filed for arbitration and later sued the employer alleging that the employer discriminated against him because of his age in discharging him from employment. The Court held that a feesplitting provision which requires an employee to share the costs of arbitration does not per se render a mandatory arbitration agreement unenforceable. All these courts have held that whether a feesplitting provision makes an arbitration requirement unconscionable depends on the circumstances of each case. Although not totally settled, these decisions, with the Supreme Court's GREENTREE decision, make this the leading view.

The courts, however, are not the only word on this issue. The Protocol says that impartiality is best assured by the parties sharing the fees and expenses of the arbitrator. In cases where the economic condition of a party does not allow equal sharing, the parties should make mutually acceptable arrangements to achieve that goal if possible. Without an agreement, the arbitrator should decide the allocation of fees. The designating agency, by negotiating the parties share of costs and collecting such fees, could reduce the bias potential of disparate contributions by forwarding payment to the mediator or arbitrator without revealing the parties' share therein. 94

On the subject of attorney fees, the Protocol says that the amount and method of payment for representation should be decided between the claimant and the representative. It recommends, however, several existing systems which provide employer reimbursement of at least some of the employee's attorney fee, especially for lower paid employees. The arbitrator should have the authority to provide for fee reimbursement, in whole or in part, as part of the remedy according to applicable law or in the interests of justice.

One published employment arbitration agreement form says that unless precluded by decisional or other law in the jurisdiction where venue lies for the arbitration, the employee will bear part of the reasonable expenses of the arbitration up to the lesser of (a) onehalf of the expenses, or (b) an amount equal to two (2) days of the employee's gross annual cash compensation (including bonuses, commissions and related cash compensation) during the twelve (12) months immediately preceding the notice of claim initiating the employment dispute arbitration procedure. The employer bears the remainder of the expenses. The employee may voluntarily elect to bear half of the expenses and the arbitrator is not to be informed whether the employee has made such an election.

ACCESS TO INFORMATION

As with the right to representation issue, there does not appear to be any specific court decision discussing the question of access to information. One reason for this is probably the fact that most of the litigation which occurs on these questions happens before the parties are actually engaged in the arbitration. Another