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Strip illegal terms from arbitration agreements

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in Compensation and Benefits,Human Resources

If you use an arbitration agreement for Texas employees, be aware that including terms that limit the kinds of relief employees can seek in arbitration aren’t legal.

You can’t, for example, require employees who arbitrate a Fair Labor Standards Act (FLSA) claim to pay your legal fees if they win. That’s illegal because the FLSA doesn’t allow employers to collect attorneys’ fees when the employee loses unless there are extenuating circumstances, such as bad faith on the part of the employee who brought the lawsuit in the first place.

Recent case: Paulita and over 30 other exotic dancers who worked for strip clubs under common ownership were classified as independent contractors. The women received tips directly from customers.

Paulita and her colleagues filed an FLSA lawsuit, seeking to collect unpaid wages and overtime, arguing they should have been classified as employees, not independent contractors.

But they had all signed an arbitration agreement that purported to require the dancers to pay the clubs’ legal fees if they lost. The agreements also stated that the dancers would have to pay back any tips they had earned while entertaining customers if they won the arbitration and were owed wages or overtime.

The court said the two clauses were invalid. First, the legal fees clause violated the FLSA because employers aren’t entitled to legal fees, absent bad faith. Second, turning over tips if they lost the arbitration might mean their pay would fall below minimum wage. The clause therefore violated the FLSA minimum wage provisions and wasn’t valid. (Coronado, et al., Gold Cup, et al., No. H-13-2179, SD TX, 2015)

Final note: Arbitration agreements can be tricky. Make sure you have your attorneys draft them up. Have them updated regularly based on the latest legal decisions.

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