You are likely already bound by many mandatory arbitration clauses tucked away in your contractual agreements, whether as an employer, employee, or even a consumer. This has traditionally been the route for companies hoping to deter class action claims from customers and employees, and to keep their disputes out of the public eye. However, after facing an unreasonable amount of individual arbitration demands by consumers regarding the Echo Dot device, Amazon jumped ship on arbitration due to the impending massive costs. Because of this decision, consumers can now file individual claims against the company or even group together in a class action.
While receiving thousands of arbitration demands is something likely unique to only the largest companies like Amazon, employers should still consider certain factors when deciding to include an arbitration clause in their agreements with customers and employees.
Arbitration is often thought of as a process by which parties can skip the hassle of dealing with the formal judicial system and dispute their claims quicker, cheaper, and by their own rules. The less-considered side of arbitration is that smaller claims are almost always impractical and there is little opportunity for recourse.
Like anything else, arbitration has its pros and cons, which usually divides employers into two camps: those eager to arbitrate and those that are hesitant. Certain processes are altered once you enter arbitration, and proper consideration of the effects of these changes may reveal which camp you prefer.
The opportunity to avoid the court system and essentially pick your ‘judge’ are driving factors for those that are pro arbitration, but these are not always good things. The cost of hiring an arbitrator is high, often much higher than most parties would pay for an attorney. This is because the arbitrator is not just commonly a retired judge or lawyer, but he or she is also an expert in the particular field of the claim. With expert knowledge, comes expert prices. On top of that, while there is no requirement to have one, it would be unwise to arbitrate without legal counsel. Thus, you are faced with paying two lawyers (i.e., yours and the arbitrator). Then, tack on the filing fees, which are often greater than double the cost of filing in court, with the employer paying the brunt of the price. Overall, while it could seem more efficient to skip the courts, arbitration is certainly not always cheaper.
Then there are those hesitant to arbitrate, and for good reasons other than cost. In arbitration, the rules and procedures change. This means evidence that may exculpate a party in court could potentially be inadmissible in arbitration. Likewise, some procedures that protect a party in court may be thrown out in arbitration, allowing for a much more difficult and stressful pre-trial process. It’s no certainty that abuse of the process will happen in arbitration, but the mere gamble that it could is enough to deter many.
Do it the Right Way
Under the Texas Arbitration Act, only claims that arise during or after the execution of an agreement to arbitrate may be enforceable. This means that if you hoped to arbitrate an employee’s claim but did not have an arbitration clause in effect at the time of the event which gave rise to the employee’s claim, you are not entitled to a valid and enforceable arbitration without the employee’s consent. Beyond timing, and without written consent from both parties and their respective lawyers, Texas recognizes several exemptions from the Texas Arbitration Act such as labor unions, property acquisition, personal injury, and workers compensation benefits. Further, if your company decides to take the route of mandating arbitration, the provisions must be made correctly to be effective.
Arbitration agreements are like all other contracts in that they require the same basic elements to pass muster. This also means, however, that general contract defenses can be brought in court to combat arbitration agreements. Most notably, when adding an arbitration clause to an employment agreement, make sure that there is mutual assent and that the employee has equal bargaining power.
On its face, mutual assent is simple: both parties agree to be bound by the contract—in this case, bound to arbitrate all employment-related disputes. More recently, courts have begun to entertain disputes over whether the employee explicitly agreed to arbitrate. Assent is lessened by simply signing a contract on the last page when elsewhere deep within the document lies an arbitration clause. However, California and Texas courts have both recognized continued employment as a form of implied consent to arbitrate, with Texas turning on the issue of notice. As a matter of general practice in Texas, an employer’s best move is to make its arbitration policy known to employees, and once employees have such notice and continue to work, they will likely be held to have accepted the policy.
The other major issue with mandated arbitration for employees is whether the agreement was fairly bargained-for. Like any other contract disagreement, an unequal share of power in negotiating terms and the agreement being offered on a take-it-or-leave-it basis show up frequently in arbitration disputes. The California Supreme Court offered guidance to employers by enacting a five-part test to determine whether an arbitration agreement was fair to the employee. And although California law is unlikely to touch Texas employees, these arbitration clause guidelines can make the difference in questions of unconscionability: the arbitrators will be neutral, statute-based remedies will not be limited, discovery will be sufficient to adequately arbitrate the claim, the arbitration decision will be written and reviewed for statutory accuracy, and finally the employer will pay all costs unique to arbitration.
Although it may seem like mandated arbitration agreements serve to keep employee or customer claims out of the court system, it is best to remember that the agreement itself can be litigated in court. Following the guidelines above and ensuring that the provision was properly agreed to and was fairly made is the best avenue an employer can take when trying to stay out of court by opting for arbitration.