Potential Benefits of Arbitration Agreements



By: Claudia D. Orr


Let me begin by disclosing that I am on the American Arbitration Association’s (“AAA”) employment panel list and regularly serve as an arbitrator (or mediator) in cases.  But, even so, I don’t recommend arbitration agreements for all of my clients. However, two recent cases demonstrate little known reasons why an employer may want to consider arbitration agreements with its employees on some or all employment claims.

First, the ability to prevent class actions or the consolidation of claims was highlighted in a recently published decision of the Michigan Court of Appeals.  Lauren Bienenstock & Associates, Inc v Lowry, et al. This court rarely publishes decisions (making them precedent) so when it does, it’s worth reading.  The case filed by Lauren Bienenstock & Associates (“Bienenstock”), a local court reporting firm, involved a dispute over compensation it allegedly owed under independent contractor agreements that it had with over 20 court reporters.

The independent contractor agreements contained an arbitration clause that required disputes to be resolved through AAA.  Initially, the court reporters filed a lawsuit in the Macomb County Circuit Court, but Benienstock successfully argued that the claims had to be resolved through arbitration and that case was dismissed.  In response, the court reporters filed a demand for arbitration with AAA and, because AAA’s rules allow for class arbitration, they filed it as a class action alleging the class numbered in the hundreds.

Class actions can be a very efficient way of resolving claims, and they can be very lucrative for the attorneys representing the class.  For example, let’s say each of one hundred plaintiffs is owed $1000 in unpaid wages.  If an attorney is representing 100 plaintiffs on a contingency fee basis (normally 1/3 of the amount of settlement or judgment), the attorney would make $333 for each plaintiff, or $33,300 total. If the attorney had to litigate a hundred separate lawsuits to earn $33,030 in fees, it would be impractical. However, if the attorney could litigate just one lawsuit and also receive the extra compensation that is often awarded by courts to class action attorneys, now it is worthwhile. That is why there is a very large uptick in collective (class) actions under wage laws. There is a similar motivation for plaintiffs (and their attorneys) to “consolidate” claims, even when their cause of action would not qualify for class status.

Thus, Bienenstock filed an action in Oakland County Circuit Court seeking to enjoin the arbitration from moving forward as a class action.  On appeal, much of the court’s opinion has to do with whether a court, or the arbitrator assigned to the case, should decide whether a class action (or consolidation of claims) was permitted under the arbitration agreement.  In the end, the court decided that the arbitrator had the authority, not the court, to make this ruling.  I won’t belabor this point because a simple solution around this issue is to specify in the arbitration agreement “who” gets to decide threshold or gateway issues.

What is interesting though is how very important it is to get the right ruling on whether the arbitration agreement would allow for a class action or a consolidation of claims. Again, this is a drafting issue, and one of the most important reasons for having an arbitration agreement (at least for wage claims), is to require claims to be brought individually and not as a class action or a consolidation of claims.  If the agreement removes the financial incentive for representing employees with relatively small amounts of damages (which is often occurs with unpaid overtime for lower wage workers), the employer is less likely to face such claims.

The second case, Broussard v First Tower Loan, Inc, involved a transgendered male who outwardly appears as a man, but who had a driver’s license indicating “female”.  Upon hire, Broussard was forced to explain the discrepancy, was handed the dress code, and was told he would have to dress as a woman. He also had to agree, in writing, that his “preference to act and dress as male” did not comply with personnel policies and that if there was an overnight business trip, he would be assigned to share a room with a woman.  When he refused, he was fired.  This all comes under the heading of “what were they thinking?”

Broussard filed a charge with the Equal Employment Opportunity Commission (“EEOC”) and, once the EEOC made a finding of cause in his favor and issued a right to sue letter, he filed a lawsuit in the federal District Court for the Eastern District of Louisiana.

As you know, pursuing claims based on transgendered status and sexual orientation is among the EEOC’s current priorities, so it sought to intervene in the lawsuit and lend its support to Broussard.  Unfortunately, Broussard had an arbitration clause in his employment agreement requiring him to arbitrate all employment related claims.  The court found the claims to be within the scope of the agreement and stayed the federal case.

The EEOC displeased with the ruling, sought reconsideration. It argued that it was not a party to the arbitration agreement and not bound by it. While the court agreed that the EEOC was not bound by the agreement, represented the public interest, and was not merely seek relief for Broussard, the facts and claims significantly overlapped. In fact, the EEOC had argued that the “nexus of factual circumstances central to the EEOC’s claims will be those at issue in Mr. Broussard’s suit” when it sought to intervene.  Therefore, the findings of the arbitrator could have a preclusive (or binding) effect on the outcome of the federal lawsuit. Thus, the federal case remained stayed.

So, another benefit of an arbitration agreement may be to avoid the EEOC (or another state or federal agency) from intervening in a case and rendering assistance to your former employee.

There are numerous factors to consider some weighing in favor and some against arbitration, including potential perils under the National Labor Relations Act. But, an employer may want to consider a limited arbitration agreement that requires wage claims to be brought through arbitration on an individual, not collective/class action basis and that prohibits the consolidation of claims. Whether an arbitration agreement with your employees is beneficial should be discussed with, and drafted by, an attorney who specializes in employment law, like the author.

This article was written by Claudia D. Orr, who is Chair of the Legal Affairs Committee of Detroit SHRM, and an experienced labor/employment attorney at the Detroit office of Plunkett Cooney (a full service law firm and resource partner of Detroit SHRM).  She can be reached at corr@plunkettcooney.com or at (313) 983-4863.  http://www.plunkettcooney.com/people-105.html.

Detroit SHRM encourages members to share these articles with others, inside and outside their organization, as long as its name and logo, and the author’s information, is included in the re-post of the article. March 2016.