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Beware of Arbitration Clauses and Class Action Waivers

If your employer presents you with a contract or employee handbook that has an arbitration clause and class action waiver, be very careful about signing or accepting. These clauses can prevent you from bringing an action in court against your employer, including a class action. And, the bad news is that courts are now enforcing these clauses against employees, at the direction of the Supreme Court. Signing one of these clauses can have a major impact on your rights down the road if your employer violates your legal rights.

Here are the basics about arbitration clauses and class action waivers. First, we'll discuss what they are, then we'll discuss how you can spot one, and finally we'll discuss what, if anything, you can do if your employer presents a contract or employee handbook with one of these provisions.

What is Arbitration?

Arbitration is a form of alternative dispute resolution. It is an alternative to suing in court. Arbitration is similar to court in that the parties submit their case to a third party (an arbitrator) who decides for one of the parties after receiving evidence. An arbitrator, instead of a judge, makes the decisions in arbitration.

An arbitrator is paid by the parties who are in arbitration, unlike a judge who is paid by the government. An arbitrator's decision is binding on the parties and their decision will only be overturned by a judge if it is completely wrong--for instance if it ignores the law or is in some other way arbitrary.

Unlike when you bring a case in court, an arbitration is a private matter and decisions made there are not used as precedent. Also--and more troubling--is the potential unfairness to an individual in arbitration. First, arbitration is very expensive. An arbitrator is quite frequently a lawyer whose hourly rate may be several hundred dollars. A large company may be able to pay an arbitrator much more easily than an individual.

Also, a large company may have an arbitrator that it uses all the time. In other words, that arbitrator makes a lot of money from repeated work for the company. If that's the situation, who is the arbitrator going to decide for--its large, well-paying, frequent client or the individual who is opposing that client and will likely never see the arbitrator again? Although judges can have their own personal predispositions, they are not beholden to a paying client like an arbitrator is.

For a great example of what kind of power a company has over an arbitrator, read up on the Major League Baseball player Ryan Braun's first suspension for using PEDs. As you may know, Braun tested positive for PEDs, but got his suspension overturned on a technicality--by an arbitrator. Major League Baseball then fired the arbitrator! Lesson learned: an arbitrator's decision against its client means no more client. Whose side will the arbitrator take in your case?

What is an Arbitration Clause?

An arbitration clause is a term in a contract that requires both parties who sign the contract to bring any disputes in arbtiration instead of court.

What is a Class Action Waiver?

A class action waiver is frequently included with an arbitration clause. A class action waiver says that the employee cannot bring or participate in a class action. In other words, the only kind of case an employee can bring--whether in court or in arbitration--is an individual, one-one-one case against their employer.

How to Spot an Arbitration Clause and Class Action Waiver

Spotting one of these clauses in a contract is important, and it's not always easy. In one of my cases, the defendant added one of these clauses to the contract and my clients--two of whom were lawyers--didn't realize it was there.

An arbitration clause and class action waiver are usually added to the end of the contract, where you are less likely to see them because you are (1) tired from reading the beginning carefully and (2) assuming that the stuff at the end of the contract isn't important.

Because arbitration clauses and class action waivers are difficult to spot, and because they can severely limit your rights, I suggest that you seek the help of an attorney if you are presented with any contract or handbook by your employer. To be specific, I recommend that you speak to an employment attorney, because an attorney working in another field of law may not realize that an arbitration clause and class action waiver are hot-button topics at the moment (for instance, an arbitration clause is common in contracts between big businesses).

If you're reading through a contract or handbook, here is some language that you can look for to spot an arbitration clause and class action waiver.

First, the obvious: if you see the word "arbitration" or "arbitrate" in any contract heading or text, you probably have an arbitration clause. As I write this, I cannot think of a way an employer can force you to arbitrate without using one of these words. You may see a citation to the "Federal Arbitration Act" or the "FAA" in an arbitration clause.

Now, for the less obvious. Class action waivers can be much harder to spot. They use legal terms such as "joinder," "collective action," "representative action" and "individual basis," each of which are words that are common in class action practice but may not jump out at someone who is unfamiliar with this area of law.

An arbitration clause and class action waiver may also appear under a heading that does not use the word "arbitration." I have seen these clauses appear under a heading titled "Governing Law."

To see a sample of an arbitration clause and class action waiver, look at the block quote on page 3 of this recent opinion by the Second Circuit.

What Can You Do if You're Presented With an Arbitration Clause or Class Action Waiver?

Unfortunately, there is no easy answer to this question. Courts have now made it clear that an employer can require you to agree to an arbitration clause and class action waiver, so the employer has all the bargaining power: it becomes a "take it or leave it" proposition. Further, having a discussion with an employer about potential litigation when you're hired--and the relationship is good with no thought of a lawsuit--can be somewhat awkward. At the moment, the law of arbtiration clauses and class action waivers is still developing, and it's moving quickly. If you are presented with one of these clauses, you may be best off checking in with an employment attorney to determine what rights you have.

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