Are your arbitration agreements “up to code”?

By: Melissa M. Tetreau, Bodman PLC

Employers for a variety of reasons, including procedural expediency, confidentiality, and avoidance of a jury, regularly use arbitration agreements. Obviously, the most critical part of an arbitration agreement is ensuring its enforceability. To many employers, it seems only fair that an employee who files a claim against it should be required to pay a portion of the arbitrator’s fee and costs. But, employer beware. If an employee brings a claim under a law which provides for the losing party to pay the prevailing party’s attorney fees, these fee-splitting provisions may be invalid.

On November 22, 2019, the Eleventh Circuit Court of Appeals (covering Alabama, Georgia, and Florida), invalidated the fee-splitting portion of P.I.P., Inc.’s arbitration agreement.[1] Three former P.I.P. employees filed a lawsuit alleging violations of the Fair Labor Standards Act (“FLSA”) and seeking, among other things, costs and attorneys’ fees pursuant to the FLSA. Because they had signed employment contracts that included an arbitration provision, P.I.P. asked the trial court to send the parties to arbitration.

In response, the employees pointed out language in the agreement stating that each party “will pay its own fees and expense, including attorney fees.” The employees argued this language invalidated the arbitration provision because they were entitled to have P.I.P. pay their attorney fees and costs as a remedy under the FLSA. They claimed that the agreement improperly denied them that right.

P.I.P made the logical response – the arbitration agreement simply required each party to pay their own way through arbitration. Nothing in the agreement barred the arbitrator from shifting the fees after he or she made a decision. The trial court disagreed and invalidated the arbitration provision. After P.I.P. appealed, the Eleventh Circuit Court of Appeals agreed with the trial court. It found that because the arbitration provision stated that each “party to any arbitration will pay its own fees and expense,” the arbitrator had no discretion to shift fees after a decision. Since the employees could prevail at arbitration and not receive the attorneys’ fees and costs they would be entitled to, that portion of the arbitration provision was invalid. The court of appeals sent the case back to the trial court to decide if only the fee-splitting provision was invalid, or if this invalidated the entire arbitration provision. If the trial court decides the latter, P.I.P will be forced to defend the case in court.

Although this decision is not binding on courts in Michigan, it demonstrates the trick bag in which arbitration agreements can put employers. While the story may be complicated, the moral is simple: review your arbitration agreements with experienced counsel.

Melissa Tetreau is a member of the Detroit SHRM Legal Affairs Committee and an attorney with the law firm of Bodman PLC.  She can be reached at MTetreau@bodmanlaw.com.

                                     

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.  November 2019.

[1] Hudson v. P.I.P., Inc., No. 19-11004 (11th Cir. Nov. 22, 2019).