Should I Have an Arbitration Agreement with my Empoyees?

You'll have many questions if a remote employee threatens legal action. 

In what state will the dispute be?

Who will decide the outcome of the case? 

How long does the employee have to file a case? 

Can the employee file a class or collective action?

But the biggest question that most employers and employees have is this: will my case go through arbitration or trial?

Arbitration is when parties agree to take their dispute to a private decision-maker: the arbitrator. The arbitrator should be a neutral, third party. The arbitrator hears the evidence and then makes a binding decision. Arbitration takes the decision out of a jury’s hand.

If you don’t reach a written agreement on dispute resolution before an employee files a lawsuit, your employee could drag you into court on the other side of the country years after employment ends. You don’t want this. So consider a signed agreement on how, when, and where to resolve legal disputes with your employees.

For purposes of this article, let’s call these kind of agreements a “dispute resolution agreements,” and let’s explore the provisions you might include in your company’s dispute resolution agreement. 

Class and Collective Action Waiver

Under a class and collective action waiver (“class waiver”), employees waive the right to file or participate in a class action. The main reason to consider a class waiver is that it helps avoid massive lawsuits and bad-faith litigation. 

A class waiver is a wise tool to protect your company so that small, correctable mistakes don’t evolve into a significant lawsuit based on nuanced areas of state or federal law. I almost always recommend class waivers. I also often encourage employers to consider including a private attorney general action waiver if they have employees in California. 

Time Limitations

A time limitation agreement restricts an employee's time for filing a lawsuit or bringing a claim. Without a time limitation agreement, employees have however long the statute of limitations provides. Remote work creates unpredictability because employees in different states have different statutes of limitations. A time limitation agreement restores a level of predictability.  

Ordinarily, depending on the type of claim, the statute of limitations will run for two to six years. A time limitation agreement, however, will usually provide one hundred eighty days, or whatever the statute of limitations provides, whichever is shorter, for the employee to file suit. 

Limiting the time for employees to file suit creates certainty and makes your business more attractive to potential investors or purchasers. In a merger and acquisition, you’ll likely need to disclose and allocate liabilities. A time limitation agreement reduces your company’s liabilities, which increases its value. 

Jurisdictional and Venue Agreements

A jurisdiction and venue provision is an agreement on where disputes get resolved. Your company headquarters is likely the best place to gather your witnesses and evidence. The courts near your company headquarters are also where your attorney is most comfortable. 

Admittedly, this can be inconvenient for remote employees who work in other states. But given your remote employee is provided with the benefit of a flexible work environment, it’s a fair trade. If the employee gets to work where he wants, then the company should benefit from litigation where it wants. A jurisdiction and venue provision can also help deter an employee from filing a meritless lawsuit. The cost and inconvenience of traveling to the agreed-upon location can provide a healthy reality check so that employees only file good faith claims.

Arbitration 

Under an arbitration agreement, the employer and employee agree to use a neutral and approved arbitrator to resolve legal claims rather than go through the court process. An arbitrator is like a judge for hire. Arbitration can be expensive. You pay your attorney, the arbitrator, and possibly your employee’s attorney fees. 

The advantage is that disputes can get resolved more quickly and quietly. Arbitration agreements often make sense in industries where privacy is at a premium or when there is concern about an unpredictable jury awarding sky-high damages. For companies attracted to arbitration by fear of an unpredictable jury, a jury waiver might be a more straightforward solution than an arbitration agreement. 

Conclusion

When it comes to dispute resolution agreements, there’s no one-size fits all approach. Talk with your attorney and your human resource leader. They can work together to develop an agreement that stands a good chance of being enforced. Then, offer it in a natural, organic, and forthcoming way. These types of agreements should not be an attempt to pull the wool over your employees’ eyes. They shouldn’t be awkward, either. 

For the most part, courts agree that employees and employers have broad discretion in deciding how and where disputes get resolved. There are exceptions, of course. You should be especially aware of these potential exceptions when there are claims involving sexual harassment. 

Set up a dispute resolution agreement that works for your company and your employees. In doing so, you’ll probably have a much stronger chance of cost-effectively solving legal issues before your fees become too high. 

Also, even with the best dispute resolution agreement, you'll eventually face a legal claim. So ensure your company has employment practices liability insurance (EPLI) coverage. Even though insurance often excludes coverage for damages on key employment claims, EPLI usually still kicks in for a part of the legal fees. This coverage can be a lifesaver.