Legal Updates

June 2004

Arbitration of Employment Disputes

Mandatory arbitration of employment disputes, including discrimination claims, has become widely used by employers. Arbitration has some advantages over traditional litigation, but may not be right for all situations. Employers should carefully consider whether and when arbitration is right for them. Set forth below are some considerations as to whether arbitration should be utilized and, if the decision to arbitrate is made, increasing the chances that the employer's arbitration agreement will be enforced.

The Arbitration Agreement
Employers who have entered into pre-dispute arbitration agreements with employees can require employees to arbitrate covered claims. However, not all attempts to enter into a binding arbitration agreement are successful. In the first instance, the agreement to arbitrate must be contained in a binding contract. Courts have ruled that an arbitration agreement is not enforceable if it is contained in an employee handbook that also contains a disclaimer that it is not a contract. To be enforceable regarding discrimination claims, the arbitration agreement must also preserve all statutory remedies. Other requirements include clear notice that the employee is waiving the right to file a lawsuit and of the employee's right to be represented by a lawyer. The agreement must also provide a method for selection of “neutral” arbitrator and provide for "reasonable" pre-hearing discovery. It should also be noted that in Michigan, an agreement to arbitrate is irrevocable only if it states that the arbitrator's award is final and binding and that judgment on the award may be entered in a court of competent jurisdiction (circuit court).

In addition to legal requirements for enforceability, an employer should consider other potential issues that may need to be addressed in the agreement to arbitrate. For example, in situations where the agreement is silent as to whether class action claims are subject to arbitration, the United States Supreme Court has ruled that whether the parties intended that class claims be arbitrated is for the arbitrator to decide. Also, unless the agreement provides otherwise, there is a limited opportunity for judicial review of the arbitrator's award. Arbitration awards may only be vacated by a court in very limited circumstances, such as when the arbitrator acts outside his or her authority as set forth in the parties’ agreement or acts in “manifest disregard of law” - mere legal or factual error will not suffice.

Should Your Company Have An Arbitration Agreement?
Arbitration has some advantages over traditional litigation. Arbitration is generally perceived as a faster and less expensive means of dispute resolution, although sometimes in practice it is neither. Arbitration is also conducted without a jury, which, from the employer's perspective, removes the possibility of a "runaway" jury. Arbitration however, is not a panacea, and there can be significant drawbacks. For example, an arbitrator’s mistakes will likely be unreviewable by a court. By way of comparison, if a trial judge makes a mistake during a lawsuit in court, there is a right to have an appellate court review the judge’s decision. In addition, with some arbitrators, there is an increased risk that the arbitrator will “split the baby” in issuing an award, which may result in payment by the employer even in cases that are without merit.