Enforceability of Arbitration Agreements
The Court of Appeals for the Ninth Circuit has ruled that employees may be required to consent to arbitration of all Title VII claims as a condition on employment in Equal Employment Opportunity Comm’n v. Luce, Forward, Hamilton & Scripps, aligning the Ninth Circuit with the rest of the country on this issue. Now, employers may require employees to agree to arbitrate not only Title VII claims, but also other grievances between the parties that may arise during the course of employment. An employer may require a potential or current employee to agree to arbitrate “all claims arising out of employment,” which includes claims sounding in tort and allegations of discrimination based on age, race or disability. Furthermore, refusal by the employee to agree to arbitration of potential future employment-related claims allows the employer to revoke the offer of employment.
The arbitration agreement may also encompass potential claims arising under the Arizona Civil Rights Act (“ACRA”). The Arizona Court of Appeals held that the ACRA was modeled after the federal Title VII, so that federal case law interpreting Title VII is persuasive in interpretation of the ACRA. Since federal law permits agreement to arbitrate Title VII claims as a condition on employment, an arbitration clause covering ACRA claims is also likely permitted.
The United States Supreme Court held that so long as the arbitration agreement does not diminish the employee’s substantive rights, then it may be valid and binding on the parties. However, it is important to note that an arbitration agreement does not bind the Equal Employment Opportunity Commission (EEOC) from pursuing a claim in court on behalf of the employee since the EEOC is not a party to the agreement.
The ruling in Luce, Forward does not necessarily mean that all arbitration agreements in employment contracts will be enforced. The arbitration clause in an employment agreement must still meet general contract requirements applicable under state law. Arizona generally recognizes arbitration agreements as enforceable and irrevocable contracts, absent legal or equitable reasons to justify their unenforceability, where the following elements are present: (1) a mutuality of obligation; (2) formal requirements such as writing and signature; (3) consideration by both parties (for example, the employer should also relinquish the ability to pursue claims against the employee in court); and (4) the agreement is free of mistake, fraud, misrepresentation, undue influence, or duress. If an arbitration clause is invalid because it fails to meet the state law requirements, it will not be enforced by the courts.
When considering inclusion of an arbitration clause in an employment agreement, the employer must consider several factors and requirements in order for the agreement to be binding. For guidance, the Ninth Circuit has delineated several critical considerations in determining whether an arbitration agreement is unconscionable and, therefore, unenforceable. These considerations include: (1) a provision limiting coverage to claims brought by the employee while the employer is free to pursue claims in court; (2) limits on the damages or remedies available; (3) one-year statute of limitations on arbitrating claims; a prohibition of class actions; (4) permitting the employer to unilaterally alter the agreement; and (5) a cost-splitting provision whereby the employee may be liable for the employer’s share of arbitration costs even if the employee wins. Additionally, if the clause is part of a collective bargaining agreement as through a labor union, it may not be enforceable, unless it is agreed to by each individual employee.
Although the policy adopted by Arizona is to apply arbitration agreements broadly, if the particular claim being pursued is not specifically stated in the agreement, it may be deemed to be outside the scope of coverage under the agreement so that it may be brought in court. The agreement must outline which claims are covered by the agreement with a complete and accurate definition of the scope of the agreement. In addition, the employer should require that each employee sign an acknowledgment of receipt and agreement to the arbitration provision. If the agreement is included as part of an employee handbook rather than as a separate agreement, specific reference should be made to the arbitration agreement in the handbook acknowledgment form.
Employers who decide to use arbitration agreements should discuss the options and requirements with legal counsel. These agreements must be carefully drafted and include specific language as to its application and scope to be enforceable. An invalid arbitration agreement will more than likely land you in court twice: first, a determination by the court that the agreement is invalid; and second, determination of the substantive issues of the claim.