An update on arbitration agreements:
Why it's important to watch your language.

Employer guidelines from Thilman Filippini risk specialists

By Bob Schneider, CSP ARM CHCM, Vice President
Thilman Filippini Loss Control Division

"Oppressive." "Unconscionable." "Absence of meaningful choice."

Those terms might seem more descriptive of a political tyranny, but this is precisely the kind of verbiage that's been used by several state courts to strike down - as "unenforceable" - a number of mandatory arbitration agreements between employers and employees or third parties.

What's going on here? You'll recall that only a few years ago, such binding agreements were upheld by the United States Supreme Court as a way to quickly resolve disputes without clogging an already sclerotic justice system. Many employers rushed to incorporate arbitration agreements into their Human Resources policies and procedures.

The potential benefits are self-evident:

• Disputes are resolved privately and expeditiously.
• Arbitration is generally less costly than going through the courts.
• Arbitrators are more knowledgeable than most judges or jurors, who frequently have no experience with employment law or disputes (except their own).

But there are drawbacks, too.

• In some states, the arbitration system in effect makes every dismissal "without cause" the subject of a hearing.
• Unfavorable rulings by arbitrators have proven extremely difficult to overturn.
• Rules of evidence that govern court proceedings normally don't apply. Hearsay, for example, is admissible.

What's most important for employers to keep in mind is that the Supreme Court's favorable decision was in principle only. In practice, there remain quite a few substantive and procedural wrinkles to be ironed out. Recently we've seen contradictory rulings by state supreme courts and federal appeals panels. They amount to a clear warning:

Even though most arbitration agreements conceptually are enforceable, your legal language (and the intent of the agreement) must pass a number of "tests."

If substantive or procedural provisions are found to be unfair, many state courts have the latitude to invalidate an entire agreement - not just the offending portions - under what's called the doctrine of unconscionability. Let's take a brief look at these two linchpin legal issues:

Substantive unconscionability refers to the terms of the agreement. Consider a case in Arizona. The 3rd Circuit Court of Appeals threw out a binding agreement with two crane operators because it required submission of any claim within 30 days, provided only limited access to remedies and required the losing party to pay all costs. The 30- day reporting provision, in particular, was cited as a "shock to the conscience."

Procedural unconscionability concerns how the agreement was negotiated. If a court feels that one party (invariably the employer) exercised undue coercive power it may invalidate the document.

Here are the four main "tests" that judges take into consideration:

• Was there absence of meaningful choice for one party. For example, was the agreement offered on a "take-it-or-leave-it" basis?
• Were the contractual terms unreasonably favorable to one party?
• Was there unequal bargaining power between the parties?
• Were there oppressive, one-sided or unfair terms in the contract?

In other words, to be enforceable an arbitration agreement must be drafted - and perceived - as a good-faith alternative to litigation instead of a forum designed to be advantageous for an employer. As always, we strongly recommend a document review with counsel.