Arbitration agreements can be an effective tool to avoid costly litigation, and, in particular, to prevent class and collective actions. But, will your arbitration agreement withstand scrutiny? Here are some tips on what to do—and not do—when drafting arbitration agreements for new hires.
First, consider whether and for what kinds of employment disputes you might want arbitration. Arbitration has some advantages. It is typically quicker and more cost-effective than litigation. It allows a trained legal professional (often a retired judge) to dictate the results of the case, rather than risking an adverse outcome with a jury. Because arbitrations are private, the proceedings, claims, and ultimate outcomes are ordinarily confidential. Most interesting to employers is that arbitrators tend to award lower damages than juries.
Of course, arbitration has some disadvantages, too. Sometimes it is neither quicker nor less expensive than litigation, and arbitrators are sometimes inclined to “split the baby,” even if the law is clearly on your side. Unfortunately, there is essentially no meaningful appeal if the arbitrator gets is wrong. But arbitrations remain an important tool for avoiding class and collective actions that could otherwise put a company out of business, especially in the wage and hour arena.
With limited exceptions, employers may lawfully condition employment on employees signing arbitration agreements. So, consider whether arbitration of some or all employment disputes is right for your business, and if so, keep in the mind the following to give your agreement the best chance of withstanding a challenge:
- Make your arbitration agreement a standalone document—it’s important enough to do so. Many employers opt to include their arbitration agreement in their employee manual. Resist the temptation!
- If you send the arbitration agreement electronically, ensure that employees affirmatively agree to arbitration (for example, use a click box stating that “I have read the company’s arbitration agreement, I understand the terms, and I agree to be bound by them.”)
- Avoid “browserwrap” agreements in electronic arbitration agreements. That is, the terms of the agreement should be on the electronic display in the agreement itself; do not make the terms accessible only through a hyperlink.
- Identify the claims covered by the arbitration agreement.
- Make the arbitration agreement mutual. The employer should also agree to arbitrate claims that may arise against the employee.
- Include a class action / collective action waiver.
- Select a neutral arbitrator.
- Choose a local arbitrator. Most states prohibit arbitration agreements that require employees to travel out-of-state for arbitration.
- Ensure your arbitration agreement does not limit an employee’s right to investigate their claims. Do not include provisions of strict confidentiality limiting the employee’s right to speak to other employees about wages or the terms and conditions of employment.
- Do not limit the relief an employee can seek. Do not cap damages or exclude claims allowed to be brought by an employee.
- Include a delegation clause allowing the arbitrator, and not the court, to decide whether a particular claim is covered by an arbitration agreement or if the arbitration agreement is enforceable.
- Include a severability clause, providing that if a provision of the arbitration agreement is invalid, the rest will remain enforceable.
- Include a provision that the company will pay for the arbitration. Avoid any unconscionability arguments regarding an employees’ inability to pay an arbitrator’s fee.
Companies may want to consider excluding sexual harassment claims from arbitration agreements. The #MeToo movement has spurred criticism of companies that compel arbitration of sexual harassment claims or force employees who allege sexual harassment to sign settlement agreements with confidentiality clauses, effectively shielding the company from public scrutiny.
In the wake of the #MeToo movement, several Fortune 100 companies no longer require their employees to arbitrate sexual harassment claims. In November, Google announced it would no longer require arbitration of sexual harassment claims. Microsoft and Uber made similar policy changes within the last year. Other companies may follow suit.
Regardless, companies should be cognizant that arbitration agreements will likely be challenged by employees and should take steps to ensure their arbitration agreements will withstand employees’ challenges.