It has become common practice for employers to require employees to sign mandatory arbitration agreements as a condition of employment. To be enforceable in California, these agreements must require both employers and employees to pursue all legal claims that may arise through binding arbitration rather than trial by jury. The purpose of these mandatory agreements is to provide an efficient and speedy dispute resolution process for both the employer and the employee.
Mandatory arbitration agreements typically appear either as a clause in or addendum to the employment contract itself. Employees generally will be required to sign arbitration agreements before they begin work. Sometimes, however, employers will impose arbitration agreements on current employees. Employers may refuse to hire prospective employees who do not sign a mandatory arbitration agreement, and an employer may condition continued employment of an existing employee on the signing of such an agreement.
Taking Away Employee Rights
Even though these agreements have become a standard feature of employment contracts, this does not mean that they are necessarily fair, especially for employees.
By signing a mandatory arbitration agreement, an employee waives important rights, including:
- The right to bring a claim to court. By agreeing to mandatory arbitration, the employee waives his or her right to bring a claim before a jury. Since California juries may give larger awards than California arbitrators, employees favor the jury system. Just presenting a claim to a California jury, however, does not mean that the employee will win. An employee must have a righteous and compelling case to prevail at either arbitration or jury trial.
- The right to appeal. An arbitrator's decision is both binding and final: there is generally no way to appeal the decision of an arbitrator unless the arbitration agreement provides for an appeal. California courts do have limited power to review an arbitrator's decision, but the review power is much more restrictive than that of a general appeal.
- The right to full discovery. Without full discovery, employees may not be able to collect all the information necessary to argue their side of the story. Arbitrators, in their discretion, can order or limit discovery as they see fit. Absent a compelling dispute, Judges typically do not exercise such power over discovery.
- The right to certain motions. In some cases, the parties waive the right to make summary judgment or other dispositive motions. This means they cannot ask the arbitrator to dispose of an issue and thereby avoid going through the entire arbitration process.
- Other rights. Additional waivers may be enforced, depending on the specific language of the arbitration agreement. Further, the rules of arbitration vary depending on the arbitration service (i.e. AAA, JAMS or ADR, to name a few), and each set of rules has peculiarities which must be followed by the parties.
Generally, in the mandatory arbitration agreement, an employer may dictate such things as the identity of the arbitrator and the rules (i.e. federal or state) which will be followed in the arbitration. More commonly, though, the arbitration agreement simply identifies the arbitration service which will conduct the process. As a result, and in large part because employers are required to pay all but a small portion of the arbitrator's fees, the chances of an employee securing a favorable outcome are generally more difficult than in a comparable court case. Large awards are rare for employees who do succeed in arbitration, and the awards are usually less than they would have received in a jury trial.
Not all mandatory arbitration agreements are valid and legally enforceable. In California, if an arbitration agreement is found to be unconscionable, then the agreement cannot be enforced against the employee.
In Armendariz v. Foundation Health Services, the California Supreme Court set forth the elements of a valid mandatory arbitration agreement. In order for a mandatory arbitration agreement to be valid, it must:
- Provide for a neutral arbitrator
- Provide for more than minimal discovery
- Require the arbitrator to issue a written decision
- Provide for all of the types of relief that would be available in court
- Include the costs of the arbitrator
California courts generally consider mandatory arbitration agreements that do not provide these minimum protections to employees to be unconscionable and unenforceable.
Making Arbitration Agreements Fair
Although the guidelines provided by the California Supreme Court in Armendariz offer some protection, mandatory arbitration agreements generally favor the employer over the employee. For example, arbitrator neutrality is always a concern when the employer pays the arbitrator's fees. Fee splitting is not a viable solution, as employees usually do not have the resources to pay even one-half of the arbitrator's fees, which can be upwards of $50,000.00 - $100,000.00 or more.
In addition, a finding for an employee may jeopardize the arbitrator's working relationship with the employer, which could lead to less business for the arbitrator. Thus, arbitrators may find themselves reluctant to rule against a large employer, and may also feel pressure to give smaller awards to employees with righteous cases. It can be hard to find against one's own self-interest, and arbitrators are no less susceptible to this problem. One solution to this problem would be to have Judges appoint an arbitrator, with the right of each party to object only on the grounds of prejudice. This would allow arbitrators to find in favor of employees (and even give large awards) without the fear of financial ruin.
One thing is clear — that arbitration reform is clearly needed, especially to remove the financial incentive for arbitrators to find in favor of large employers.
Just because you have signed an arbitration agreement, you should not simply give up. Many employees have successfully arbitrated their cases, and their experiences have been positive. Each situation is different, so it is always prudent to obtain as much information as you can about your case. It is, therefore, important to consult with competent legal counsel to discuss your rights and obligations under your mandatory arbitration agreement before making any decisions on whether or not to pursue your claims.