Arbitration Clauses in Employment Disputes: Staying Out of Court


The explosion in employment claims litigation highlights the need for employers in Hawaii to become more aggressive in avoiding the court system for resolution of employment disputes. Very few Hawaii employers have the financial ability to survive the recent decision of a jury in Iowa which awarded a victim of sex harassment $82 million.

Such astronomical awards are responsible for the meteoric rise in the use of mandatory private adjudication--or Alternative Dispute Resolution ("ADR"). Under ADR, the forum for dispute resolution is switched, by agreement between the employer and the employee, from the courtroom to a conference room. Instead of going before a judge and jury, the dispute is resolved by a neutral but experienced third party arbitrator, who is empowered to issue a binding and final decision.

Typically the agreement to arbitrate is entered into at the time of employment, well before any actual dispute has even arisen. Such pre-dispute agreements have proven to be the only effective means of reducing the ever-burgeoning litigation costs and the frustrating delays which plague our court system. Most employers embracing arbitration do so because ADR will give their employees workplace justice, through a system that is quick, fair, more predictable and not "out of control."

Perhaps even more important, employers opt for arbitration to limit the cost of resolving marginal cases. With arbitration as an option, employers can afford to fight cases before an experienced arbitrator who knows the "law of the shop" and will not be unduly influenced by the "deep pockets" of the employer.

State Supreme Court Upholds Arbitration Clauses

Last July, the Hawaii Supreme Court, in a unanimous 5 to 0 ruling, gave the "green light" to employment claims arbitration, by upholding the enforceability of a pre-dispute arbitration commitment contained in an employment application used by Kentucky Fried Chicken. The Court underscored the public policy of Hawaii which favors arbitration as the preferred method of dispute resolution. The Court rejected the employee's argument that he could not have "voluntarily agreed" to arbitration, because his employer presented the arbitration obligation to him as an applicant on a "take it or don't take the job" basis.

How to legally implement an arbitration agreement

There are a number of tips which employers must follow in implementing an arbitration agreement:

  • The employee should sign a written agreement to arbitrate any employment claims covered by the agreement. To avoid legal challenge, do not bury such an agreement in the employee handbook.
  • Claims which are covered by the mandatory arbitration requirement should be carefully defined--such as all claims which might arise out of termination or discipline (including constructive discharge), or any denial of promotion, or complaints regarding the existence of a hostile workplace environment based on sex, race, age, or other prohibited discriminatory conduct.
  • Because there must be a knowing voluntary waiver of statutory rights, employees must be fully informed, in writing, as to the legal effects of the arbitration agreement i.e.--that the employee is waiving rights to a jury trial and court rules of procedure, in return for the benefits of arbitration such as cheaper and speedier resolution of their claims against the company.
  • To avoid any legal challenge to arbitration, the agreement should not diminish the employee's substantive legal rights (such as imposing limitations on recoverable damages or the right to attorney's fees (should the employee prevail), nor impose unreasonable limitations on the time deadlines for filing a claim.

Be Aware of What Arbitration Agreement Cannot Do

Arbitration agreements cannot deprive the EEOC or the Hawaii Civil Rights Commission of jurisdiction to accept and investigate an employee's claim of discrimination. Either agency can also sue the employer, since the agencies are not a party to the agreement to arbitrate. Also, an arbitration agreement cannot cover any worker's compensation claims or unemployment claims, nor does it apply to those who do not sign the agreement, such as the employee's spouse.

Finally, arbitration agreements cannot relieve the employer of the duty to conduct impartial and effective investigations into employee misconduct to avoid claims for discrimination or wrongful termination.