Despite the courts' general acceptance of even-handed and properly adopted mandatory arbitration policies, a federal court in Florence, South Carolina, recently struck down an employer's arbitration scheme because it effectively denied an employee the right to bring her claims in an impartial forum and limited the legal remedies that she would be entitled to receive for sexual harassment.
In Hooters of America, Inc. v. Phillips, a former waitress at the company's Myrtle Beach restaurant claimed that the brother of Hooters' CEO and several managers had made unwelcome sexual advances toward her, and that management had failed to respond to her complaints. As a preemptive measure, Hooters asked the court to compel Phillips to submit her claim to arbitration under an arbitration agreement she had signed during her employment at the restaurant. Phillips admitted that she had signed the agreement, but countered by arguing that because Hooters' management had misled her when it presented the agreement for her to sign, she did not "knowingly and voluntarily" waive her right to proceed in court. Further, she argued that the court should not enforce the agreement because it unfairly "stacked the deck" in favor of Hooters.
Court Refused to Allow One-Side Arbitration Agreement
The court agreed with Phillips. First, the court noted that the arbitration agreement referred to and incorporated by reference a complex set of rules. Among other things, these rules eliminated or severely limited the amount of punitive and compensatory damages, back pay, front pay, and attorney's fees that employees could recover in an arbitration proceeding; made employees, but not Hooters, disclose in advance the identity of their witnesses; limited employees to one deposition of a Hooters representative without imposing similar limitations on the company; prohibited employees from recording the proceedings; gave Hooters the right to change the rules without notice; and gave Hooters the sole responsibility for selecting the pool of eligible arbitrators.
The accompanying rules were never discussed when the agreement was presented to Phillips and other Hooters employees or otherwise made available to them. According to the court, Phillips could not waive her right to sue in court and submit to arbitration if she did not know what she was waiving when she signed the agreement.
Next, the court found that it would be "unconscionable" to enforce the agreement and compel Phillips to arbitrate her claims under the Hooter's scheme. The court was swayed by Phillips' relative lack of bargaining power, Hooters' failure to disclose its arbitration rules, its attempt to severely limit Phillips' rights under federal discrimination laws, and the lack of neutrality in the selection of arbitrators. Even if the agreement had been properly entered into, the court noted, Hooters' idea of arbitration was "sham arbitration, deliberately calculated to advantage Hooters in any proceeding in which claims are initiated against it."
Mandatory Arbitration Agreements Not Always Disfavored
While the Phillips decision does not prevent employers from adopting mandatory arbitration policies, it cautions employers to avoid the temptation to implement procedures that increase their odds of winning or improperly limit their potential exposure. After Phillips, employers interested in developing mandatory arbitration policies should make sure that their policies incorporate basic standards of fairness. At a minimum, the procedures should ensure that:
- The arbitration will be conducted by an independent and impartial arbitrator chosen by agreement of both the employer and the employee;
- The arbitrator has the authority to award any remedy that would have been available to the employee if he or she had brought a lawsuit in court under the applicable law;
- Both the employee and employer have the same access to documents and witnesses and the employees are allowed to engage in equal pre-arbitration discovery rights; and
- Employees have the right to be represented by counsel at their own expense.
In Conclusion
We also recommend that employers obtain signed, stand-alone agreements, rather than unilaterally-imposing mandatory arbitration in a policy or employee handbook. This approach will help establish that an employee's waiver of his or her right to proceed in court is both knowing and voluntary. The ultimate outcomes obviously are less certain if employers adopt these safeguards; however, the benefits of arbitration -- such as avoiding jury trials and expensive discovery, and obtaining prompt results -- are not sacrificed.