Recent Developments in Arbitration of Employment Disputes

The U.S. Court of Appeals for the Fourth Circuit has taken a leading role in enforcing various types of employment agreements requiring binding arbitration to resolve workplace disputes. In Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), the first U.S. Supreme Court endorsement of contractually-mandated arbitration of statutory employment claims, the Court unanimously affirmed a Fourth Circuit decision.

As a condition of employment, the plaintiff in Gilmer had been required to register as a securities representative with the New York Stock Exchange. The application for his securities registration, known as a Form U-4, contained an arbitration clause under which the plaintiff agreed to arbitrate any disputes with his employer arising out of his employment. When the plaintiff filed an action claiming that his termination violated the Age Discrimination in Employment Act (ADEA), the Fourth Circuit ruled that the case was subject to compulsory arbitration.

Fourth Circuit Requires Arbitration for Discrimination Claims

In 1996 the Fourth Circuit became the first Circuit Court of Appeals to require an employee to arbitrate discrimination claims pursuant to a collective bargaining agreement (CBA). In Austin v. Owens-Brockway Glass Container, Inc., 78 F.3d 875 (4th Cir.), cert. denied, 117 S.Ct. 432 (1996), the plaintiff sued her former employer for violating Title VII and the Americans with Disabilities Act (ADA). Her employment was covered by a CBA specifically providing that claims of discrimination were subject to the grievance procedure.

Following the last step of the grievance procedure, an unsettled dispute "may be referred" to arbitration. Even though the Supreme Court had held in Alexander v. Gardner-Denver Co., 415 U.S. 36 (1974), that an arbitration provision in a CBA cannot bar an employee from bringing a statutory discrimination claim in court, the Austin court concluded that an agreement to arbitrate is enforceable whether it is contained in a Form U-4, a private employment agreement, or a CBA. 78 F.3d at 885. The court stated that Gilmer "rejects the principal concern in Gardner-Denver that arbitration is an 'inappropriate forum' for the resolution of " discrimination claims. Id. at 880.

Other District Courts Have Rejected Fourth Circuit's View

While the Supreme Court denied certiorari in Austin, the Fourth Circuit's decision has been rejected by the Sixth, Seventh, Tenth, and Eleventh Circuits, which have continued to apply Gardner-Denver holding that an employee's right to a judicial forum cannot be waived in a CBA. See Penny v. United Parcel Serv., 128 F.3d 408 (6th Cir. 1997); Pryner v. Tractor Supply Co., 109 F.3d 354 (7th Cir.), cert. denied, 118 S. Ct. 294 (1997); Harrison v. Eddy Potash, Inc., 112 F.3d 1437 (10th Cir.), petition for cert. filed, 66 U.S.L.W. 3137 (U.S. Aug. 6, 1997); Brisentine v. Stone & Webber Eng'g Corp., 117 F.3d 519 (11th Cir. 1997). In Martin v. Dana Corp., 114 F.3d 428 (3d Cir. 1997), vacated, rehearing en banc granted, No. 96-1746, 1997 WL 575880 (3d Cir. Sept. 12, 1997), a panel of the Third Circuit agreed with the Fourth Circuit that under certain circumstances an employee could be bound to submit her statutory claims to arbitration under the terms of a CBA. Subsequently, however, Martin was vacated and rehearing en banc granted.

Fourth Circuit Requires Arbitration for FMLA Claims

In 1997 the Fourth Circuit became the first federal appeals court to compel arbitration of an FMLA claim, and one of the first to compel arbitration of a statutory claim based on a general agreement between an employee and employer. In O'Neil v. Hilton Head Hospital, 115 F.3d 272 (4th Cir. 1997), the plaintiff signed a form acknowledging receipt of the employer's employee handbook. The acknowledgment form provided that, as a condition of continued employment, the plaintiff agreed to submit any complaints that arose out of her employment to binding arbitration.

The form referenced the employer's comprehensive arbitration procedures. When the employer discharged her, the plaintiff filed suit alleging that her termination violated the FMLA. The district court denied the employer's motion to stay the litigation until an arbitration panel could resolve the plaintiff's complaints. But the Fourth Circuit reversed, holding that the arbitration clause prevented the plaintiff from pursuing her lawsuit.

Other Circuits Follow Fourth Circuit on FMLA Arbitration

During 1997 five other Circuit Courts considered whether private employment agreements or similar documents may require arbitration of statutory claims. Four of these circuits, the District of Columbia, the Third, Fifth, and Eighth Circuits, reached the same conclusion as did the Fourth Circuit in O'Neil. See Cole v. Burns Int'l Sec. Servs., 105 F.3d 1465 (D.C. Cir. 1997) (plaintiff in race discrimination action required to arbitrate claim based on signed detailed stand-alone arbitration agreement that bluntly warned employees of consequences of signing or not signing); Great Western Mortgage Corp. v. Peacock, 110 F.3d 222 (3d Cir.), cert denied, 118 S.Ct. 299 (1997) (sexual harassment plaintiff required to submit claim to binding arbitration because she had signed clearly written, detailed stand-alone arbitration agreement); Miller v. Public Storage Management, Inc., 121 F.3d 215 (5th Cir. 1997) (ADA plaintiff required to submit claim to arbitration based on signed employment contract containing detailed arbitration clause); Patterson v. Tenet Health Care, Inc., 113 F.3d 832 (8th Cir. 1997)(plaintiff required to submit claim of sexual harassment to arbitration based on signed employee handbook acknowledgment form specifically referencing employer's comprehensive arbitration procedures).

Ninth Circuit Refused to Follow the Fourth Circuit

Only the Ninth Circuit refused to compel arbitration of a discrimination claim based on an employee handbook acknowledgment form that did not specifically reference the employer's arbitration procedures. Nelson v. Cypress Bagdad Copper Corp., 119 F.3d 756 (9th Cir. 1997) (unilateral promulgation by employer of mandatory arbitration provisions in employee handbook, which were arguably hidden in text, cannot produce a "knowing and voluntary" waiver).

EEOC Comes Out Against Arbitration for Discrimination Claims

One month after the Fourth Circuit's decision in O'Neil, the Equal Employment Opportunity Commission (EEOC) declared its opposition to mandatory arbitration. In a policy statement, the EEOC stated that "agreements that mandate binding arbitration of discrimination claims as a condition of employment are contrary to the fundamental principles evinced" in the federal employment discrimination laws. The agency impliedly threatened to litigate the issue. Policy Statement on Mandatory Binding Arbitration of Employment Discrimination Disputes as a Condition of Employment, EEOC Notice No. 915.002 (July 10, 1997). See EEOC v. Doherty Enterprises, Inc. (2015) 126 F. Supp.3d 1305.

Advantages and Disadvantages of Arbitration for Employers

Because the Fourth Circuit's approach to mandating arbitration based on individual employment agreements, unlike its approach to mandating arbitration based on CBAs, has been widely applied, non-union South Carolina employers may consider inserting procedures in employee contracts and handbooks that require the employer and its employees to arbitrate all claims arising from employment.

Advantages of Arbitration

Compared to civil litigation, arbitration offers two main advantages to employers: time and money. Arbitration allows employers to avoid jury trials. Over 30,000 new employment discrimination cases are filed in federal courts every year. Richard T. Seymour, Trends in Fair Employment Litigation, 1997 Midwinter Meeting of ABA Labor and Employment Law Section, at 2. In addition, an arbitrator almost certainly will be more experienced in dealing with employment disputes, and less likely to award excessive damages, than will jurors. In 1995, the last year for which national statistics are available, employees won 48% of all wrongful termination cases that went to trial, and the median jury award in such cases was $204,310. Tips to Tackle Wrongful Termination (LRP Publications 1995), at 10-11.

Arbitration also is advantageous because discovery and motion practice are more limited than in court litigation, reducing litigation expenses and demands on management and staff time. While limited discovery and motion practice may be a disadvantage to employers in defending some cases, the reduced expenses and disruptions usually outweigh the drawbacks. Another advantage offered by arbitration is that generally it is more informal and provides more privacy to the parties than does court litigation. The informality of arbitration contributes to relatively speedy hearings, and arbitrators typically render prompt decisions.

Disadvantages of Arbitration

Although arbitration may provide more rapid and less costly resolution of employment disputes, other aspects of arbitration may diminish these benefits. For example, an easily accessible, relatively inexpensive private forum for employee claims may result in an increase in the number of such claims. Some employees who feel they have been treated unfairly may not be willing to pursue their claims by filing an action in court, but they may be willing to pursue arbitration.

Another disadvantage of arbitration is that some arbitrators are less inclined to follow established principles of law and burdens of proof and are unduly concerned with perceptions of fair treatment. Some arbitrators tend to compromise even strong cases for employers by ordering reinstatement of former employees with limited monetary relief. Arbitrators also are generally less receptive than courts to technical and "procedural" defenses (e.g., statutes of limitations) and rarely eliminate claims on motions to dismiss or motions for summary judgment.

Finally, the scope of judicial review of an arbitrator's decision is much more limited than the scope of review of a decision by a trial judge or jury. Thus, an employer may find itself bound by an unfavorable arbitration award, whereas if it were in federal or state court, an unfavorable decision could be appealed and possibly overturned.

Issues to Consider in Drafting Arbitration Provisions

Attorneys drafting arbitration provisions for South Carolina employers should keep in mind that arbitration is a matter of contract between the parties. In determining whether a valid arbitration agreement exists, courts will apply ordinary principles of South Carolina contract law. See Reese v. Commercial Credit Corp., 955 F. Supp. 567, 569 (D.S.C. 1997). In South Carolina, a mutual promise to arbitrate constitutes sufficient consideration. Rickborn v. Liberty Life Insurance Co., 468 S.E. 2d 292, 300 (S.C. 1996).

Some employers simply include arbitration policies in employee handbooks. However, an employer has a greater likelihood of demonstrating the employee's knowing and voluntary agreement to arbitrate if it can produce an express agreement signed by the employee, such as a signed handbook acknowledgment form containing an arbitration clause and referencing the employer's arbitration procedures. See O'Neil, 115 F.3d at 273. This reality is especially true if an employer revises an existing employee handbook to add an arbitration procedure. See Fleming v. Borden, Inc., 450 S.E. 2d 589, 595-96 (to modify an implied employment contract with a subsequent handbook, the employer must give employees actual notice of the modification).

Ideally, the arbitration agreement signed by the employee should state that the employee has carefully read and understands the agreement's terms and that he has entered into the agreement voluntarily. The agreement should be written in clear language and provide for arbitration procedures which meet minimum fairness and dues process standards. Following are five recommended "due process" protections, based in part on the National Rules for the Resolution of Employment Disputes, issued by the American Arbitration Association:

  1. The arbitration will be heard by an independent and impartial arbitrator chosen by agreement of both the employee and the company.
  2. Either the employee or the company may make a reasonable request for copies of relevant documents from the other party, and both parties will provide each other with a list of the witnesses they intend to call to testify at least 10 days before the arbitration. No depositions or other discovery will be allowed unless ordered by the arbitrator.
  3. The employee and the company will share the costs of the arbitration, but the employee's share of the costs will not exceed an amount equal to one day's pay.
  4. The employee and the company may be represented by legal counsel at each party's expense. The company should state that it strongly encourages employees to consult with an attorney of their own choosing if they have any questions about whether they should be represented by counsel. It should be stated that the employee and the company are responsible for the fees and costs of their own legal counsel, and any other expenses and costs, such as costs associated with the attendance of witnesses or obtaining copies of hearing transcripts.
  5. The arbitrator should be given the authority to award any remedy that would have been available to the employee had he or she litigated the dispute in court under applicable law. The arbitrator should be required to issue a written opinion with a statement of reasons for the award. Finally, to protect the employer's rights to enforce non-compete and non-disclosure agreements, the arbitration policy should not apply to claims by the company for injunctive relief and/or other equitable relief for unfair competition and/or the use or unauthorized disclosure of trade secrets or confidential information. The company should retain the right to seek appropriate relief for these wrongdoings in court.

In conclusion, the Fourth Circuit has taken the lead in encouraging arbitration agreements dealing with employment disputes by enforcing them whenever possible. Given this trend, South Carolina employers and their attorneys should consider the advantages and disadvantages of arbitrating workplace disputes.

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