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Should You Run from the “A” Word?

Evaluating the Impact of Arbitration Clauses in Executive Employment Agreements

Al Franken’s Arbitration Fairness Act of 2015 is making progress under the radar.  He has recently managed to double the number of co-sponsors from 12 to 24 as it percolates in the Senate Judiciary Committee.   When originally offered in November of last year, the New York Times revisited the headline-grabbing vilification of mandatory arbitration clauses.  They were called “a perfect example of how government is taking away the power of individuals and handing it to the trial lawyers,” and their use was said to “circumvent the court system and derail legal claims alleging predatory…wage theft, discrimination, and other violations…tend[ing] to favor businesses over individuals.”  Indeed, Franken (D. Minnesota), deems these clauses sufficiently evil that his bill would, under certain circumstances, prevent employers from requiring its employees to submit to arbitration at all.

So, you’re an executive with a pending contract offer and you see the “A” word. You may be wondering whether you should automatically reject the offer because of the arbitration provision.  As experienced executive compensation attorneys, our answer is definitely no.  There is much more at stake in an offer of employment than just dispute resolution.  Stop, take a step back, and examine all of the many factors to be considered in context.

Here are some of the moveable parts of dispute resolution clauses which, in the context of negotiating all of the terms and conditions of your employment agreement, may be up for grabs.

What Disputes Will the Arbitration Clause Cover?

It is possible to have an arbitration clause, but to pick and choose which types of disputes it will govern.  Often, the clause will provide that all disputes arising under the employment contract or related to the employment relationship are subject to arbitration.  But executives in the trenches have frequently found that only disputes over compensation and termination are better decided in arbitration.  When it comes to claims of discrimination and harassment, a jury trial might be the better way to go.  Employees who have gotten a raw deal on the basis of age, race, gender, ethnicity or sexual orientation, for example, might find a jury more sympathetic to their plight than an arbitrator.  Also, in cases of egregious employer wrongdoing, juries may choose to award punitive damages and grant significant amounts for emotional distress; arbitrators cannot.

It may, instead, be the employer who wishes to carve out exceptions to an arbitration provision.  These exceptions most often apply to alleged breaches of restrictive covenants involving confidentiality, non-disclosure of propriety information, non-solicitation and non-compete clauses applicable both during and post-termination.  The motivating factor behind such carve-outs is the fear of irreparable harm; employers would rather seek expedited injunctive relief and/or damages in court.  And here’s a legal loophole not included even in the small print:  regardless of whether these breaches fall under the umbrella of arbitration, your employer can still go to court in search of emergency injunctive relief “in aid of arbitration” before the arbitration proceeding moves forward.  That is, employers can go into court to immediately stop you from doing whatever it is they are accusing you of doing, pending a final determination in arbitration.

So, even if you agree to an arbitration clause, carefully evaluate any exceptions to arbitration which you or your prospective employer may want to make.

How Many Arbitrators Will Hear Your Case?

The arbitration clause may specify whether the controversy will be heard and decided by a single arbitrator or a panel of three.  Unless there is a strong chance that the issues which might arise under your contract will be of a highly complex or technical nature – for example, the creation, patenting, ownership and ongoing confidentiality of high-tech intellectual property—you may, in the interests of controlling time and costs, want to opt for a single arbitrator.

How Is an Arbitrator Chosen?

The choice of arbitrator may be left to the parties’ later agreement.  However, much more frequently, employers will have decided upon a forum.  They may designate the American Arbitration Association, JAMS, FINRA, or some other organization or individual.  Each of these alternate dispute resolution services has its own pool of arbitrators, and its own policies and procedures governing everything from the filing of pre-and post-hearing statements and memoranda, to the breadth and depth of discovery proceedings, including interrogatories, depositions and demands for documents.  The more numerous and extensive the requirements, the costlier the proceedings are likely to become.  Generally, these procedural rules can be modified by contract.  Read them carefully.  You may want to accept all or only some, and vary others.

Who ends up deciding the dispute does not end with the choice of forum.  Infrequently, a particular arbitrator or panel may be named in your contract.  But ordinarily, once an arbitration proceeding has been filed with an arbitration organization, you and your employer will be provided with an available pool of arbitrators from which to choose.  Before reaching an agreement, you will need to vet each individual name provided; you must carefully weigh each one’s credentials and his or her prior experience both in presiding over arbitrations and in working within your particular industry.

Also, beware of the potential for bias.  Here again, court proceedings have an advantage.  Of course, judges, like everyone else, are human, and come with their own past experiences and viewpoints.  But they are entrusted with applying the law fairly and impartially.  They do not have an economic stake in the outcome of the cases they decide.  But arbitrators are different; to stay in business, they are perforce concerned with attracting repeat customers.   Although they do not have a direct stake in the awards they make in any given matter, they do strive to rise to the top of the arbitrator pool and be the go-to choice the next time their corporate employer “customers” are in again need of arbitration services or making referrals to others employers.   It is easy to see how this may lead to a pro-employer bias.

Less common, but perhaps even more impactful, will be the employer’s choice of a religious tribunal in lieu of secular arbitrators or arbitration associations.  Not only might the rules of dispute resolution be determined by such a tribunal, but the actual law to be applied to your matter might be based on a religious code, rather than on Federal, State or local law, too.  Religious forums might be less amenable to individualization.

Where Will the Arbitration Take Place?

While we are on the topic of forum, don’t forget the matter of venue.  Bargain to have any arbitration held in a location convenient for you.  This is particularly important if the employing company is headquartered or has satellite branches in other countries or states or in distant cities.   Travel, accommodations, and time away can considerably to the expense and hassle of dispute resolution.

How Is the Arbitrator Paid?

Another factor potentially in play is who will be responsible for payment of the arbitration organization’s costs and the arbitrator’s hourly fees.  Will the employer and employee share equally in the costs and/or fees?  Or will the initiating party pay the costs, but still split the fees?  Perhaps the arbitration clause provides that the prevailing party gets off scott-free?  Look out: if your employer wins, you could get stuck with the bill!  Or maybe it is left to the arbitrator to apportion or assign costs and fees as he or she see fit.  And then there is the question of attorneys’ fees?  Will the employer and employee each pay their own attorneys’ fees?  Or, again, will it be left up to the arbitrator’s discretion whether to award reasonable attorneys’ fees to the prevailing party?  This may not be as straight-forward as it at first appears.  In cases decided in court, whether by judge or jury, there is ordinarily a clear winner and a clear loser.  But in arbitration, who won can be difficult, if not impossible, to ascertain.  Arbitrators will often “split the baby.”  That is, rather than decide a case on a winner-takes-all basis, they tend to fashion awards which give each party at least a piece of the controversial pie.  In such cases, depending on the extent to which the award is split and subjective considerations of fairness, attorneys’ fees may be awarded to an unclear winner, or each party may bear the burden of paying his or her own way.

Other Things to Consider about Arbitration Clauses

Consider whether the arbitration mechanism is mutual.  That is, must your employer bring disputed matters to arbitration, or are only you constrained to do so?

In some instances (depending, for example, on your seniority, length of service, or the issue or amount in controversy), either you or your employer may want to leave open the possibility of opting out of some or all of an arbitration provision under certain circumstances, and set some timing mechanism for doing so.

Consider whether the arbitrator’s award and decision is meant to be the last word.  Will it be final and binding upon the parties?  Can it be ordered entered and enforced as a judgment by a court of competent jurisdiction?  Or will the parties have a right to appeal the arbitrator’s findings and decision, either through arbitration or in court?   Under Federal and State arbitration statutes, there is virtually no possibility for a meaningful appeal, except in the most extraordinary of circumstances.  So, unless your contract explicitly provides otherwise, you will have no recourse from an unfavorable decision; no matter how unfair it may seem, you will likely be bound to the arbitrator’s findings.

Check to see whether the inclusion or omission of an arbitration provision, and its specific terms, is in conflict with any employee handbook or policy manual.  If there is a discrepancy between the two, make sure to address it in your contract, so that there will be not question down the line of which provision should prevail.  This is particularly important if your contract includes an explicit representation that you have been made aware of the employee policies, rules and procedures put in place by your employer, and are agreeing to abide by all of them.

Here’s the take-away: arbitration is just one factor to consider before making crucial employment decisions, but an important one and should be taken seriously. So, proceed with caution.  Even if your prospective employer has chosen arbitration, the discussion need not necessarily end there.  Remember that arbitration clauses do not have to be blanket provisions.  They can be cut into a variety of shapes and sizes.  Once you have made a realistic assessment of your bargaining power, line up your chips and play your hand.

Carefully consider all of the potentially negotiable parts, and certainly do consult an executive compensation attorney.  The more tailored the resulting arbitration clause, the better off you will be should trouble erupt after the honeymoon is over.  But even if you are not in a position to make many, if any, changes in an arbitration clause, be aware and arm yourself with knowledge.  Don’t be blindsided.  Make sure you fully understand the many ramifications of what you are binding yourself to before accepting or rejecting that job offer.

About the Author

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Liza Horowitz

Lisa figured out years ago how to apply her lifelong love of poetry, translation and psychology to her professional passion: executive employment law. With meticulous attention to language, she interprets and powerfully voices her clients’ needs, whether drafting, negotiating or litigating on behalf of the senior executives and academicians she represents in the worlds of finance, media and higher education. Lisa holds a B.A. and M.A. from Brown University and is a graduate of Columbia Law School, where she was a Stone Scholar.