When are Arbitration Agreements Invalid?

Just a few months ago, Telios published a tip on the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 (“EFAA”). As a reminder, an arbitration agreement is a contract between two parties who agree to submit their claims to a neutral arbitrator rather than submit those claims to a court (or jury). With new federal limits on arbitration, it’s important to understand what “forced” arbitration is and when employers can utilize it. Arbitration is “forced” or “mandatory” when it is included as a condition of employment. Consider the following language:

You may accept the terms of the above arbitration agreement EITHER by signing on the line below OR by arriving for work on your designated start date. In either case, you agree and acknowledge that you have read and understand the terms of this agreement as set forth above.

An employee who refuses to sign the agreement would still be subject to its terms if they arrived for work the next day. On the other hand, if the employee had the option to work without its being in place, it would not be “forced,” and some companies are choosing to provide that as an option. Agreements like this are popping up all over the country, but are there any risks to using language like this in your arbitration agreement?

Yes and no. An arbitration agreement is a contract first and foremost. However, agreements to arbitrate have just one advantage over other contracts: the Federal Arbitration Act (FAA). The FAA does not permit invalidation of an arbitration agreement solely because it is an arbitration agreement.¹ Thus, an arbitration agreement that is signed under duress or because of fraud would not be valid just the same as any other contract. One defense to contract formation is unconscionability. This means that the contract itself is unconscionable because of public policy or because there was some defect in the contract formation process. Let’s look at an example.

Contracts May Not Be Successfully Formed: a Case Study

Sam is an immigrant from Germany. He is about to walk into his first job interview since coming to the States. He speaks very little English and had his wife present for the initial interview to help translate the basics. At the end of the interview, Sam is offered a job as a janitor and is given his new hire packet. At the end of the packet is a stand-alone arbitration agreement. Because the employer is short-staffed, Sam is set to start working at 5:00 PM—just three hours later. Sam is told to sign all the paperwork and return it to HR before starting work. The arbitration agreement states that Sam agrees to arbitrate any and all claims arising out of his employment with the company, including claims arising under Title VII of the Civil Rights Act, which prohibits various forms of workplace discrimination. The agreement includes a clause that states Sam understands he has the opportunity to see an attorney regarding the agreement and also includes the either/or language cited above.

Sam, excited to start his job but unable to understand much of the paperwork, signs all the pages that look important. He does not, however, sign the arbitration agreement—let’s say he lost that page. Nonetheless, he hands over the signed paperwork to HR and a few hours later is given his first tasks. Sam has no issues for the next few months. In fact, he’s recommended for a promotion to supervisor. Everything changes, however, when Sam gets a new manager, Charlie. Over the course of the next few months, Charlie continually degrades and disparages Sam. Several company employees overhear Charlie calling Sam a fascist, ridiculing him for his German accent, and generally making it very difficult for Sam to continue working. Finally, Charlie fires Sam over a mess that wasn’t cleaned quickly enough. Sam is extremely upset and decides to hire an attorney to see what his options are. The attorney believes Sam has a great case against the company for discrimination on the basis of national origin. Neither Sam nor his attorney is aware of the arbitration agreement until months later when the company’s attorney sends a copy of the unsigned agreement via email. Can Sam defeat the agreement he never signed?

In the above situation, Sam may have a good case for defeating the agreement as unconscionable. First, he was only given a few short hours to review the agreement, which would not have been enough time to consult an attorney beforehand. Moreover, he could not read or understand English very well and no translation was provided. Finally, he never actually signed the agreement to indicate that he understood what he was giving up in exchange for employment.

Best Practices

Regardless of whether the above agreement would be enforceable, employers should consider whether they want to fight a battle over the arbitrability of a case like Sam’s. Following certain best practices could have avoided the above situation altogether. For instance, the agreement could have included a clause stating that the paperwork was not due until a chosen date, perhaps two weeks out, which would have allowed a reasonable time for Sam to obtain an attorney or just to review the agreement fully. The employer could have offered a translation of the paperwork or even just explained the agreement before handing it over to Sam. Because the company did none of these things, it may have lost the opportunity to compel arbitration—or at the very least it has invited a challenge to the policy. Employers should be wary to avoid missteps like the ones described above. Contact an attorney to find out more ways to protect your business.

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¹ See AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011) (holding that the FAA “permits agreements to arbitrate to be invalidated by generally applicable contract defenses such as fraud, duress, or unconscionability, but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.”).

Featured Image by Rebecca Sidebotham