Arbitration agreements with employees are a hot topic – and continue to make headlines. As we covered in Part 1 of this blog series, there are many practical and legal considerations involved in deciding whether your business should require employees to arbitrate employment-related disputes (as opposed to resolving them in court). But once you have weighed the pros and cons, consulted with legal counsel, and made the decision to proceed in that direction, how do you make sure your agreements to arbitrate are enforceable?
Drafting enforceable arbitration agreements presents a challenge, particularly for multi-state employers. This is because most states have specific, individual requirements governing arbitration agreements that can range from the technical (such as requiring that employees specifically initial the arbitration provision), to the more substantive (such as prohibiting certain claims from arbitration altogether). This may seem simple enough but can quickly become complicated when attempting to draft an agreement that works for employees in multiple states. Adding to the confusion, the U.S. Supreme Court has held that the Federal Arbitration Act (“FAA”) generally preempts state statutes that single out arbitration clauses, or that serve as an obstacle to the accomplishment of the FAA’s objectives (meaning, they prevent enforcement of an arbitration agreement in accordance with its terms). But whether and to what extent a particular state’s requirements are found to “single out” arbitration clauses or “serve as an obstacle” to the FAA is often unclear in practice. Courts’ interpretations of these types of issues can vary widely and are constantly evolving, so there are no guarantees.
So, this area of law can be a moving target – which means drafting an enforceable agreement is often no easy feat. But, here are a few tips to help make yours more likely to hold up.
Avoid common unconscionability pitfalls.
Regardless of whether a technical or substantive requirement imposed by state law will or will not be preempted, the FAA generally does not preempt state laws governing contract formation. This means that defenses like unconscionability, duress, or fraud will generally still apply. The requirements of every state’s contract formation rules are beyond the scope of this article. But, there are a few things you can include in your agreement to help avoid common concerns.
A few do’s and do nots: do not make the agreement impossible to read or confusing, and do not bury an arbitration provision in fine print. Do have employees sign a standalone agreement to arbitrate employment-related disputes, rather than including such an agreement as part of a larger document, such as an employee handbook. And, although this goes without saying, do make sure your hiring managers and human resources professionals know not to rush an employee through the process of signing an agreement to arbitrate, or pressure or otherwise coerce employees into signing the agreement.
Make sure employees specifically assent to arbitration.
On a related note, an important factor in the analysis of whether an arbitration agreement is enforceable is whether the employee has specifically agreed to arbitration. So, you’ll want to make sure the agreement clearly states that the employee is assenting to arbitrate employment-related claims (and that he or she is giving up the right to a jury trial/the right to sue in court). You may even consider including a provision allowing employees to “opt out” of the arbitration requirement, or at least outlining a procedure for him or her to do so.
Make sure your agreement outlines procedures that are fair to both sides.
Make sure your agreement covers the procedures that will govern arbitration proceedings between the parties to help avoid arguments or surprises later on. One way to do this is to incorporate rules from an organization like the American Arbitration Association. There are various sets of rules applicable to different types of disputes (including specific to employment claims). These rules typically outline procedural requirements for arbitration and will provide a framework for how the resolution of a claim will proceed. Note that these rules will often limit the amount employees must pay in arbitration fees, as courts will sometimes find an agreement is unenforceable if it costs the employee more to pursue arbitration of an employment-related dispute than it would have cost him or her to proceed in court. These rules will also generally cover other important topics such as requiring selection of a neutral arbitrator, providing that any arbitral award be put into writing, and outlining the scope of what will be allowed in discovery.
Don’t forget the small stuff.
Make sure the agreement to arbitrate is mutual, meaning that both the employer and the employee agree to arbitrate claims, and, importantly, that both parties sign the agreement. Make sure that the actual employing entity is a party to the agreement. This means that employers with subsidiaries or affiliates should ensure that a corporate representative from the appropriate entity is a signatory to the agreement. Finally, be sure that your arbitration agreement carves out any other employment agreements or benefit plans that may have separate or different dispute resolution procedures.
As you can surely recognize, drafting an enforceable arbitration agreement isn’t something that should be taken lightly. Reach out to your favorite Troutman Sanders employment attorney for guidance specific to your business.