Employment Arbitration: Fair And Effective Program Design

Tuesday, November 1, 2005 - 00:00

Darin T. Allen
National Arbitration Forum

As the use of arbitration and other employment dispute resolution methods continues to grow in the United States, attention must be paid to designing and implementing dispute resolution programs that are fair, accessible, and cost-effective for employees. Contrary to the concerns of critics, mandatory employment arbitration programs will not lead to the death of the civil justice system, especially where employment arbitration programs avoid unconscionable procedural and substantive limitations. By designing employment dispute resolution policies that include detailed and easily understood terms, fair discovery procedures and costs, and the same remedies that would be available in court, employers provide meaningful access to efficient justice for employees.

Legal Overview Of Employment Arbitration

The modern debate over the use and form of employment arbitration stems from a series of United States Supreme Court cases discussing employment arbitration. A renewed interest in mandatory arbitration emerged from Gilmer v. Interstate/Johnson Lane, 500 U.S. 20, 11 S. Ct. 1647 (1991). In Gilmer, the Supreme Court held that a securities representative could be compelled to arbitrate his Age Discrimination in Employment Act (ADEA) claim. The case was significant because the securities representative was required to sign an agreement with the New York Stock Exchange stating that he would arbitrate disputes with his employer. The Gilmer decision sparked debate among employment attorneys and scholars because the Supreme Court did not decide whether employment arbitration agreements were "contracts of employment" excluded from coverage under the Federal Arbitration Act (FAA).

The contracts of employment issue that was left open in Gilmer was decided a decade later by the United States Supreme Court in Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 121 S. Ct. 1302 (2001). In Circuit City, the Supreme Court determined that the FAA covers all contracts of employment, except for transportation workers such as seamen or railroad workers, and that the FAA may be used to compel arbitration of employment claims. Even though Circuit City focused on state law claims, the Supreme Court previously determined that federal ADEA claims were arbitrable under the FAA.

Following Gilmer and Circuit City, scholars predicted that employers would embrace mandatory employment arbitration as the premier solution to expensive and time-consuming litigation. As many employers implemented arbitration policies, the courts stepped up to monitor employment arbitration to uphold the rights of employees.

In Equal Employment Opportunity Comm'n v. Waffle House, Inc., 534 U.S. 279, 122 S. Ct. 754 (2002), the Supreme Court held that, because the EEOC is not a party to an arbitration agreement, the EEOC is not bound by its terms. Given the important role that the EEOC plays in protecting the public interest, the EEOC can decide what resources to commit to recovering relief for a specific victim or pursue other remedies available to the EEOC under the federal statute.

Most federal and state courts currently accept the use of arbitration to resolve conflicts as long as the dispute resolution process is fair to employees. To be fair, employment arbitration must provide employees with proper notice, limit costs so that employees can obtain redress for grievances, allow for adequate discovery and representation by counsel, and make available the same types of relief employees could receive in court.

Guiding Principles For Employment Arbitration Programs

When designing and implementing an effective employment arbitration program, it is important to provide employees with a meaningful opportunity to resolve claims in a fair, accessible, and cost-effective manner. This means that employment dispute resolution policies must account for the wide range of remedies available to employees, and options such as negotiation, peer review, ombuds, and mediation should be considered as initial internal methods for resolving disputes. Where internal dispute resolution processes do not resolve conflicts, external mediation may be helpful. Employment arbitration programs will be most effective in ultimately resolving conflicts when the employees and employer agree on the process and trust the arbitration procedures.

Employment Arbitration Program Design Considerations

In drafting an employment arbitration agreement, the dispute resolution process must not be so one-sided to be judged unconscionable. Courts generally consider an arbitration agreement unconscionable if its terms are too unreasonable and detrimental to the interests of a contracting party. If an employment arbitration agreement would shock the conscience of a reasonable person, it is likely unconscionable. In examining unconscionability, a court will review both the procedural and substantive aspects of the arbitration agreement.

The procedural aspect of the arbitration agreement involves the details surrounding the formation of the agreement, including an assessment of the relative bargaining power of the parties and which party drafted the agreement. As the Supreme Court noted in Gilmer, mere inequality of bargaining power is not a sufficient reason to hold an arbitration agreement unenforceable. However, it is significant to note that Gilmer was experienced in business, so employers attempting to design and implement arbitration programs with employees who are not familiar with arbitration should exercise care to secure consent, and should not coerce employees into arbitration.

Employers concerned about procedural unconscionability can consider offering employees an opportunity to opt out of the obligation to arbitrate by submitting a form or checking a box. Courts have held that the availability of meaningful opt out procedures eliminates the adhesive nature of employment contracts. See Circuit City Stores, Inc. v. Ahmed, 283 F.3d 1198, 1200 (9th Cir. 2002). These methods significantly reduce the risk of an employment contract arbitration agreement being invalidated due to procedural unconscionability.

Substantive unconscionability concerns the fairness of the employment arbitration agreement terms. In particular, substantive evaluation involves a review of arbitration costs, the types of relief available to the parties, procedural limitations, and mutuality. An additional consideration, the ability to bring class action claims, is beyond the scope of this article.

Arbitration Costs. A key issue in drafting enforceable arbitration agreements is to allocate costs in a way that does not make arbitration prohibitively expensive for any of the parties seeking to file a claim. To proceed with arbitration, it is necessary to pay certain costs, including filing fees, potential administrative costs, and arbitrator fees. To avoid problems with substantive unconscionability, the arbitration agreement should provide a fair method for sharing costs between the employer and employee. In fact, many employers agree to pay all of the employee's arbitration costs to ensure that an aggrieved employee has access to the arbitral forum. As long as the employee has a meaningful opportunity to vindicate his or her statutory rights, the chances of the arbitration agreement being deemed unenforceable are considerably reduced.

Types of Relief Available. Substantive evaluation of the relief available in arbitration focuses on the type and amount of damages and on injunctive relief. Federal and state courts usually agree that arbitration regarding statutory claims must make available to the parties the same remedies that would be available in court.

One way to ensure that an arbitration agreement provides for all available remedies is to conduct arbitration using the rules of an experienced neutral administrator. For example, National Arbitration Forum (NAF) Code of Procedure Rule 20(d) states that "an Arbitrator shall follow the applicable substantive law and may grant any legal, equitable or other remedy or relief provided by law in deciding a Claim, Response or Request properly submitted by a Party under this Code." (emphasis added). By carefully selecting a reputable arbitration administrator and specifying the rules to be followed, parties to an arbitration proceeding can take advantage of all available remedies.

Employers are advised to clearly inform employees that an arbitration agreement does not prevent an employee from filing a complaint with a state or federal government agency. An arbitration agreement that prevents employees from filing complaints with the EEOC, the National Labor Relations Board (NLRB), or other agencies responsible for protecting statutory rights and serving the public interest may be subject to legal challenge.

Procedural Limitations. The speed of claim resolution and reduced legal costs are major advantages of arbitration over litigation. When designing an arbitration program, it is important to be candid with employees about the potential for reduced discovery and the less formal nature of arbitration. As the Supreme Court noted in Gilmer, by agreeing to arbitrate, a party "trades the procedures and opportunity for review of the courtroom for the simplicity, informality, and expedition of arbitration." Gilmer, 500 U.S. at 31 (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628, 105 S.Ct. 3346, 3354 (1985)).

To help employees understand the qualifications and responsibilities of the arbitrator, and to better grasp the nuances of the arbitration process, it is helpful to state at the outset what the arbitration agreement covers, including which employees are covered by the arbitration agreement and the nature of the claims to be arbitrated. In addition, the arbitration process should allow the parties to obtain basic information that is needed to present a claim. An arbitrator can resolve any disputes regarding discovery.

Mutuality. Challenges regarding the mutuality of an employment arbitration agreement usually arise where a weaker party - commonly the employee - is forced to arbitrate all claims, while the stronger party has the option of going to court. While most courts will enforce an arbitration agreement as long as both parties agree to be bound by the arbitration agreement, the better practice is to require both parties to present their claims in arbitration. Given that mutuality can be destroyed by a unilateral reservation of rights to change rules and procedures, employers seeking to implement arbitration programs should give advance notice to employees and work cooperatively any time a change to the arbitration agreement is contemplated.


An employment arbitration agreement that is detailed and clear and that is procedurally and substantively fair to all parties benefits both employees and employers. When drafting and implementing an employment arbitration agreement, it is important to advise employees concerning the nature and scope of the agreement, provide for the same relief and remedies that would be available in court, and allocate fee responsibility to give employees access to arbitration and an effective means to solve disputes.

Darin T. Allen is the Director of Employment ADR Services for the National Arbitration Forum.