Employers who have faced litigation brought by a current or former employee know all too well that such lawsuits are time consuming and costly. With employment-related lawsuits on the rise, many employers now require their employees to enter into arbitration agreements and to submit claims that could be filed in court to binding arbitration instead. These agreements stipulate that both sides agree that a private arbitrator rather than the court system will resolve their disputes. Employers find arbitration to provide a quicker and less expensive forum for resolving employment-related disputes. A well-drafted and legally enforceable arbitration agreement can be an effective instrument for cutting costs and avoiding litigation.

The Federal Arbitration Act (“FAA”), as a general rule, encourages a national policy favoring arbitration. The use of mandatory arbitration agreements in the employment field increased dramatically due to a significant ruling by the United States Supreme Court in 1991. In Gilmer v. Interstate Johnson/Lane Corp., the Supreme Court noted that parties may agree to arbitrate statutory claims, holding that pre-dispute agreements to arbitrate were enforceable.

Since the Gilmer decision, the use of arbitration agreements in employment settings has grown steadily as employers have sought ways to avoid the costs associated with litigation and to manage the risk of a jury trial and potentially large verdict. Today, mandatory arbitration agreements cover a conservatively estimated 30 million workers. To put that figure into perspective, the 30 million employees covered by mandatory arbitration agreements is greater than those covered by union contracts. (Source: Journal of the Missouri Bar — Employment Arbitration: A Closer Look. Martha Halvordson. 64:174)

Employers usually prefer arbitration over litigation for several reasons. First, they are able to avoid the time and expense of litigation. Second, jury awards are unpredictable in employment-related cases and juries are typically biased toward employees. Arbitration is a neutral forum that provides the employer a way to avoid the possibility of an unpredictable jury result, because a single decision-maker, who is presumably well-versed in business matters, will serve as the arbitrator. And third, if the individual is to continue as an employee, employer-employee relations may become less strained through arbitration than through a case that is litigated in court.

For new employees, the employer may require arbitration agreements as a condition of employment. The agreement may be included in a written employment agreement or may stand alone. Arbitration agreements are also enforceable if found in a signed application for employment. A Tennessee court will go as far as reading both the employee handbook and employment application together in order to find an enforceable arbitration clause.

Employers wishing to establish an arbitration agreement with current employees may stipulate that an employee’s continued employment constitutes valid assent. One recent case from the 6th Circuit, Seawright v. American Financial Services, upheld an arbitration clause contained in the employer’s new dispute resolution policy. The employee objected that she did not assent to the new policy’s terms because she never signed an acknowledgement form. According to the 6th Circuit, however, the employee assented to the new policy when she continued working for the employer. Thus, as long as a written arbitration policy exists and the current employees are aware of the policy, there is no requirement that an employee sign the policy. Essentially, the 6th Circuit announced it would interpret an arbitration clause between an employer and employee as it would any other employment contract.

While arbitration clauses are prevalent in the employment field, there are certain provisions which will render an arbitration clause unenforceable altogether. Tennessee courts have struck down arbitration clauses that do not require the employer to arbitrate while compelling employees to arbitrate their employment related disputes. Also, an employer’s arbitration clause may not require an employee to bear the burden of all costs associated with arbitrating an employment-related dispute and a best practice is to provide a mechanism for the employee's cost to be minimized. Finally, courts have held arbitration clauses unenforceable where the employer constrains the employee to a more limited discovery period than is allowed for in judicial proceedings.

There are some common sense drafting guidelines an employer can follow to help ensure the enforceability of an arbitration agreement. First, the employer should always provide for a neutral arbitrator, rather than one selected by a representative of the employer. Second, employers should agree to a fair procedure where the arbitrator determines the necessity of further discovery. Third, employers should not restrict the types of remedies available to the employee in an arbitration agreement and agree that both parties will be provided equal remedies.

If employers follow well-known guidelines for drafting an arbitration agreement, the agreement will become an enforceable contract that uses an arbitrator to efficiently resolve employment-related disputes. It is often said that the best way to win a lawsuit is to not have one in the first place. But most employers who have had the misfortune of facing a claim of sexual harassment, discrimination or retaliatory discharge in the court system agree that arbitration would have been a far more preferable process. While it is unrealistic to believe employment-related claims are going to decrease in uncertain economic times, through proactive policy development, employers may at least make sure that such claims go to arbitration instead of court.

Stephen Darden practices labor and employment law with Hunter, Smith & Davis, LLP. Certification as a labor and employment law specialist is not currently available in Tennessee.