Download one clause too far: why your employee arbitration

ONE CLAUSE TOO FAR: WHY YOUR EMPLOYEE ARBITRATION AGREEMENT
MAY NOT HOLD UP IN COURT.
If you are an employer, the last place you want to be is in court. An arbitration
agreement may seem like the perfect antidote to the costly attorney’s fees, stressful
depositions, and potentially irresponsible juries associated with an employee lawsuit.
What better way to keep an employee lawsuit from eating your business alive?
Unfortunately, some employers (and their attorneys) sabotage their carefullyprepared arbitration agreements by going one clause too far. In addition to requiring
arbitration of disputes, they may add clauses that limit on the employees' time to bring an
arbitration action, limit the damages the employee can recover, require the employee to
pay half of the cost of the arbitration, and provide that the employee's claims, but not the
employer's, are subject to arbitration.
There is an old adage that pigs get fat and hogs get slaughtered. The California
courts closely regulate the contents of employer-employee arbitration agreements, and
routinely refuse to enforce arbitration agreements that they perceive as unfair to
employees. This means that the employee gets to go to trial, with all of the associated
cost and inconvenience on top of the cost of the arbitration agreement and the motion to
enforce it. The lesson? Be careful not to overreach.
The Courts Will Not Enforce an "Unconscionable" Arbitration Agreement
Under Federal law, arbitration agreements must be treated like other contracts,
and cannot be singled out for special disfavor by the courts. The California courts
acknowledge this rule, but routinely invalidate arbitration agreements that favor
employers on the grounds that they are “unconscionable”.
“Unconscionability” is a valid defense to the enforcement of any contract,
including an arbitration agreement. As applied by the California courts,
“unconscionability” has two components: "procedural conconscionability" and
"substantive unconcionability." The courts will refuse to enforce a contract only if both
are present.
Procedural unconcionability refers to the way in which the employees consent to
the arbitration agreement was obtained. If the employee was forced to sign an arbitration
agreement as a condition of employment, or was somehow tricked into signing an
arbitration agreement, the agreement will be “procedurally unconscionable.”
The arbitration agreement may still be enforced unless it is also "substantively
unconscionable." Substantive unconscionability refers to the unfairness or one-sidedness
of the contract itself. In the arbitration arena, an agreement will be held "substantively
unconscionable" if it limits the employee’s rights by (among other things) making the
employee share arbitration costs, shortening the employee's time to sue, limiting the
employee’s damages, or requiring that only the employee's claims (but not the
employer's) are subject to arbitration.
What Kind of Arbitration Agreement is Enforceable?
If the court finds that the arbitration agreement is both procedurally and
substantively unconscionable, it will refuse to enforce the arbitration agreement.
Obviously, an arbitration agreement that cannot be enforced is not worth the paper it is
written on. To ensure that an employee arbitration agreement is enforceable, the
employer must make some difficult choices.
One strategy is to attempt to ensure that the agreement is not procedurally
unconscionable by (1) making sure that it is conspicuous and easy to read and
understand, and (2) allowing the employees to refuse to sign it. Of course, the obvious
drawback to this approach is that some employees may refuse to sign the arbitration
agreement. And even if the employees do sign, it may be difficult for the employer to
prove that they really had a choice in the matter.
Another strategy is to carefully eliminate all the clauses in the arbitration
agreement that favor the employer or limit the employee's rights. Terms that limit the
employee's time to sue, restrict remedies available to the employee, or apply only to the
employee’s lawsuits (but not to lawsuits brought by the employer) can be fatal to an
arbitration agreement, because the California courts view them as “substantively
unconscionable.” Similarly, an arbitration clause that requires the employee to pay for
half of the arbitration costs can also cause the arbitration agreement to be viewed as
unconscionable.
An arbitration agreement may be enforceable if (1) the employer is willing to bear
the costs of arbitration and eliminate the terms that the courts view as unfair, or (2)
allows employees to opt out of the arbitration agreement entirely. But not even the most
carefully drafted arbitration agreement is absolutely foolproof. The law in this area is
still developing, and many of the court decisions seem to display a thinly veiled
antagonism against employer-employee arbitration agreements. Careful drafting is
essential to ensure that your employer-employee arbitration agreement has a decent
chance of standing up in court.