• THE EVOLVING LAW OF MANDATORY ARBITRATION PROVISIONS IN EMPLOYMENT CONTRACTS
• EMPLOYERS MUST ADVISE EMPLOYEES CORRECTLY ABOUT FMLA BENEFITS

THE EVOLVING LAW OF MANDATORY ARBITRATION PROVISIONS IN EMPLOYMENT CONTRACTS

In Circuit City Stores, Inc. v. Adams, 121 S. Ct. 1302 (2001), the United States Supreme Court eliminated a conflict among the federal circuits and held that the Federal Arbitration Act ("FAA") applies to arbitration agreements contained in most employment contracts. This ruling gives employers the option of choosing to arbitrate employment disputes with their employees, thereby avoiding court litigation. Despite this ruling, the enforceability of mandatory arbitration provisions contained in employment contracts remains a subject of debate.

In 1995, Saint Clair Adams applied for a job at Circuit City Stores, Inc. and signed an employment application containing the following provision:

I agree that I will settle any and all previously unasserted claims, disputes or controversies arising out of or related to my application or candidacy for employment, employment and/or cessation of employment with Circuit City, exclusively by final and binding arbitration before a neutral Arbitrator. By way of example only, such claims include claims under federal, state, and local statutory or common law, such as the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, … the Americans with Disabilities Act, the law of contract and the law of tort. (Emphasis in original).

In 1997, Adams filed an employment discrimination lawsuit against Circuit City in California state court. Adams' claims were based upon California's Fair Employment and Housing Act and other general tort theories. Circuit City responded by filing an action in the United States District Court for the Northern District of California, pursuant to the FAA. In the suit, Circuit City sought to enjoin the state-court action and to compel arbitration of Adams' claim, pursuant to the arbitration provisions in Adams' employment application.

The District Court enjoined the state-court action and ordered that the claims be submitted to arbitration. Adams appealed, and the United States Court of Appeals for the Ninth Circuit reversed the District Court and held that the FAA does not apply to contracts of employment. This conclusion conflicted with every other Court of Appeals that had addressed the question. The Ninth Circuit covers Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington, Guam, and the Commonwealth of the Northern Mariana Islands.

Section 2 of the FAA (9 U.S.C. § 2) makes enforceable written arbitration agreements contained in "a contract evidencing a transaction involving commerce…" Section 1 of the Act, however, spells out an exemption that "nothing herein contained shall apply to contract of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." The Ninth Circuit relied upon this exemption language to hold that the FAA does not apply to any contract of employment.

The Supreme Court reversed the Ninth Circuit and held that the exemption stated above only applies to the employment contracts of transportation workers. Therefore, in any other employment contract, an employee may agree to submit employment disputes to arbitration. Thus, an employee may waive his right to a jury trial over any employment dispute, including discrimination claims under federal and state statutes.

On remand from the Supreme Court, the Ninth Circuit reasserted its will to refuse enforcement of the arbitration agreement for reasons not discussed by the Supreme Court. See Circuit City Stores, Inc. v. Adams, 2002 WL 152986 (9th Cir. 2002). The Ninth Circuit considered the following factors to find the arbitration agreement unconscionable and, therefore, unenforceable: (1) the arbitration agreement was a "contract of adhesion" because it was a standard-form contract, drafted by the employer, the party with superior bargaining power, leaving the employee the option of either taking the agreement without modification or rejecting it entirely; (2) the agreement unilaterally forced employees to arbitrate all employment-related claims against the employer but did not require the employer to arbitrate its claims against the employee; (3) the agreement limited the relief available to employees; and (4) the agreement required an employee to split the arbitrator's fees with the employer.

Whether the Ninth Circuit decision is appealed to the Supreme Court remains to be seen, and this Ninth Circuit decision is not binding on the other federal circuits. Indeed, other circuits have already refused to follow the Ninth Circuit's reasoning. Locally, in Gardner v. Ryan's, 2001 WL 1352113 (W.D. Va. 2001), Judge Jones of the Western District of Virginia rejected an employee's argument that the arbitration agreement she signed with Ryan's Family Steak Houses, Inc. was an unconscionable adhesion contract. In his decision, Judge Jones applied Virginia law, which defines an unconscionable contract as "one that no man in his senses and not under a delusion would make, on the one hand, and as no fair man would accept, on the other." Jones found that the arbitration agreement at issue did not rise to this demanding standard. Furthermore, the Court rejected the employee's argument that the arbitration agreement was obtained by undue influence, stating that, "the inequality of bargaining power between employers and employees has been held to be insufficient reason to render an arbitration agreement unenforceable."

Generally, the process of arbitration is quicker and cheaper than court litigation. This does not mean, however, that an arbitrator's award will be less than a jury verdict or a judge's ruling. Nevertheless, arbitration may provide a means for employers to control legal costs. An employer should consult with legal counsel to determine if a mandatory employment arbitration provision should be included in their employment contracts.

Even with an arbitration agreement, however, an employer may still end up in court. The Supreme Court recently held that an arbitration agreement entered into between an employer and an employee does not bar the Equal Employment Opportunity Commission ("EEOC") from pursuing victim-specific judicial relief on behalf of an employee in an EEOC enforcement action under one of the federal anti-discrimination statutes. EEOC v. Waffle House, Inc., 122 S. Ct. 754 (2002). This is so, according to the Supreme Court, because parties to an arbitration agreement can enforce it only against other parties to the agreement.

Because the EEOC was not a party to the employer-employee arbitration agreement in Waffle House, the EEOC could not only pursue its own equitable remedies against the employer, it could also seek personal damages on behalf of the employee. In most cases, however, the EEOC does not issue a "commissioner's charge" and take direct action against an employer. Instead, the EEOC usually issues a right-to-sue letter to the charging party who sues the employer directly.

As is apparent from the Ninth Circuit's remand decision, employers must draft arbitration agreements carefully. An agreement to arbitrate employment disputes must be in writing and supported by adequate consideration. For applicants, hiring alone may provide necessary consideration for an arbitration agreement. For current employees, continued employment may supply requisite consideration, but some courts may hold that such employees must be given a raise or some other benefit in exchange for signing an arbitration agreement.

Normally, the only parties to an arbitration agreement are the employer and the employee. Note, however, that some courts have permitted an employer to enforce an arbitration agreement between an employee and an outside arbitrator, where the employer was specifically named as a third-party beneficiary of the arbitration agreement. See Stadtlander v. Ryan's Family Steakhouse, 2001 WL 322727 (La. App. 2 Cir. 2001); and Gardner v. Ryan's, 2001 WL 1352113 (W.D. Va. 2001).

An arbitration agreement should name an arbitration group, like the American Arbitration Association (AAA), by whose rules the proceedings will be governed. Without an established procedure, an employer may lose the advantage of arbitration. Finally, depending on whether the Supreme Court reviews and reverses the Ninth Circuit's latest Circuit City decision, an arbitration agreement may need to provide that the employer will pay the arbitration fees, that the agreement will also cover the employer's claims against the employee, and it must not limit too narrowly the relief available to employees through arbitration. To increase the likelihood of enforceability, an employer should consult with legal counsel before drafting an arbitration agreement.

Eric W. Reecher

EMPLOYERS MUST ADVISE EMPLOYEES CORRECTLY ABOUT FMLA BENEFITS

Summary. When an employee experiences a serious health condition apparently covered by the Family Medical and Leave Act (FMLA), or when an employee asks for FMLA leave, an employer must quickly determine whether he/she has worked sufficient hours to be eligible for leave. An employer must accurately advise the employee of his/her rights under the FMLA as well.

Discussion. Woodford worked for her employer for approximately 12 years. During the last year of her employment, she worked 816.5 hours according to her own time sheets. On November 18, 1997, Woodford sought FMLA leave as a result of stress, anxiety, and depression. On November 19, her employer confirmed that she was eligible for leave under the FMLA, although an employee must work 1250 hours in the twelve-month period preceding leave to be eligible. After Woodford's leave began, the employer refused to reinstate her. Woodford filed an action under the FMLA in the U. S. District Court for the Northern District of New York.

The court granted summary judgment for the employer, holding that Woodford was not eligible for FMLA benefits because her time sheets showed that she had not worked 1250 hours. On appeal, Woodford challenged the dismissal of her claim arguing that her employer could not contest her eligibility under the FMLA, because her employer had confirmed that she was eligible under 29 C.F.R. §825.110(d).

Under this regulation, an employer may not deny leave or challenge an employee's eligibility for leave if, after receiving notice of the requested leave, the employer fails to advise the employee whether he/she qualifies for leave. Moreover, "the employee will be deemed to be eligible if the employer fails to advise the employee that the employee is not eligible within two business days of receiving the employee's notice."

The district court noted that Woodford "assiduously made accurate records for her own personal reference," and therefore the court relied upon her records to establish that she did not work the requisite number of hours. Nonetheless, Woodford appealed, relying upon the quoted regulation to support her contention that her actual hours were irrelevant. The U. S. Court of Appeals for the Second Circuit did not agree with Woodford.

According to the court of appeals, the FMLA defines "an eligible employee" as "an employee who has been employed…for at least 12 months by the employer with respect to whom leave is requested," and who must have "been employed…for at least 1250 hours of service with such employer during the previous 12-month period." 29 U.S.C. §2611(2)(A). The court concluded that the regulation "impermissibly expands" the eligibility of employees, because it compels employers to treat as eligible those who have not met the 12 month/1250 hour requirement. Because it contradicts the expressed intent of Congress, the Court found the regulation to be invalid.

Although the court of appeals ruled for the employer, it nonetheless found that the doctrine of equitable estoppel might assist an employee whose employer initially confirms eligibility but later backtracks and seeks to challenge eligibility. In fact, the court said in a footnote that if "Woodford [had] raised an equitable estoppel argument on this appeal, we would willingly consider it here. She did not…" Woodford v. Community Action of Greene County, Inc., 268 F.3d 51 (2nd Cir. 2001).

This issue of equitable estoppel was litigated against the employer, however, in Kosakow v. New Rochelle Radiology Associates, P.C., 2001 WL 1635489 (2nd Cir. 2001). Kosakow was employed as a part-time radiological technologist from July of 1978 until March of 1997. In June of 1996, she was advised that she possibly had a cancerous cystic growth on her left ovary. She scheduled surgery for January 14, 1997. Shortly after the surgery was scheduled, Kosakow notified her manager, who granted FMLA leave for the operation as well as time for recovery after surgery, although her hours were insufficient for FMLA leave. She continued to work through January 10, and the surgery took place on January 14, as scheduled. Kosakow remained on medical leave. In mid?February, she advised her employer that she could return to work on March 17, but on March 6, Kosakow's manager told her that her position had been eliminated and that she had been terminated.

The district court entered judgment for the employer, concluding that Kosakow failed to satisfy the minimum hours required for FMLA eligibility. Kosakow appealed that decision, contending that her employer should be equitably estopped from denying her eligibility. Relying upon Woodford, Kosakow's employer argued that she could not be "deemed eligible" under 29 C.F.R. §825.110(d) merely because the employer failed to notify her about her deficient hours. Such a finding would be in conflict with the clear statutory definition of "an eligible employee." The district court concluded, however, that Kosakow should be "deemed eligible" under the FMLA because her employer failed to notify her about her hours, and therefore it was stopped from contesting her eligibility.

On appeal by the employer, the court of appeals referred to Woodford and its conclusion that "under the right circumstances," equitable estoppel should be available to a plaintiff in Kosakow's position. The Court of appeals found that the FMLA imposes a legal duty upon an employer to inform its employees of the conditions they must meet in order to be covered under the FMLA. Kosakow's employer's silence in the face of its legal duty to inform Kosakow of her ineligibility was construed as an "affirmative misrepresentation."

Quoting the Restatement of Torts (Second), the Court of appeals concluded that while a "definite misrepresentation" may be necessary for equitable estoppel, intent to deceive is not. Because the employer failed to post a required notice or to include required information in its employee handbook about the FMLA, and because it failed to properly advise Kosakow about her hours, it failed to fulfill its legal duty, and it thereby deprived Kosakow of the opportunity to take leave under the FMLA. Finding that Kosakow could have postponed her surgery until she had worked 1250 hours, the court affirmed the district court.

Observation: Woodford and Kosakow mandate an accurate check of working hours to determine eligibility for FMLA leave. Silence about the results of that check may prevent an employer from contesting employee eligibility.

Mark M. Lawson