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Are arbitration agreements right for your organization?

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in Discrimination and Harassment,Employment Law,Human Resources,Leaders & Managers,People Management

by Amy G. McAndrew and Kali T. Wellington, Esqs.

There’s a flood of employment law litigation sweeping the nation. Blame the recession. Desperate people tend to sue when they lose their jobs or fear they will. Employment-related cases are clogging court dockets at the state and federal levels. The EEOC is fielding more and more employment discrimination claims.

Facing these realities, alternative dispute resolution is becoming increasingly popular as parties look for more efficient, less expensive conflict-resolution mechanisms. Alternative dispute resolution creates a forum for resolving disputes outside the traditional courtroom setting.

Arbitration is the type of alternative dispute resolution that’s attracting the most attention. In arbitration, parties involved in a dispute agree to circumvent the traditional judicial process and submit their claims to a third party, who then decides on a remedy.

Increasingly, mandatory arbitration clauses are surfacing in employment contracts.

Are they enforceable?

Mandatory arbitration provisions in employment agreements generally are valid and enforceable in Pennsylvania, as long as they adhere to certain parameters. Federal courts in Pennsylvania have expressed a strong presumption that arbitration provisions are valid and enforceable.

In general, a mandatory arbitration agreement will be enforceable if:

  1. It’s clear that both parties agreed to be bound by the agreement.
  2. The terms of the agreement are sufficiently defined.
  3. “Adequate consideration” has been offered—an offer of employment, bonus or raise that is specifically tied to the employee’s agreement to enter into the contract.

The contract must not be subject to claims of fraud, duress or unconscionability.

Managing arbitration costs

How the costs and fees related to mandatory arbitration will be paid is a major consideration.

Many employers include a cost-splitting mechanism in their arbitration agreements, requiring employer and complainant alike to share the expense. To determine if a cost-splitting provision is enforceable, courts look at whether it denies either potential litigant the opportunity to be heard.

The 3rd Circuit Court of Appeals has held that a cost-splitting mechanism that requires each party to pay half of the arbitration expenses will not, in itself, be considered invalid. Rather, the court will evaluate whether the costs are so expensive as to deprive the plaintiff of the ability to vindicate his or her rights.

Talk to your lawyer

If you’re thinking about including a mandatory arbitration provision in your employment contracts or employee handbook, talk to an attorney. A good lawyer can help you consider all the business and employee-relations issues—including whether mandatory arbitration will save you money.

Your attorney can also assist in developing a policy that will stand up to a legal challenge.


Authors: Amy G. McAndrew is of counsel with Pepper Hamilton LLP, in the firm’s Berwyn office. Reach her at (610) 640-7824 or mcandrewa@pepperlaw.com. Kali T. Wellington is an associate in the Labor and Employment Group of Pepper Hamilton. She can be reached at (610) 640-7801 or wellingtonk@pepperlaw.com.

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