Employment Arbitration: It Takes Two to Tango

Because employees give up important statutory rights when they agree to arbitrate claims arising from their employment, courts will closely scrutinize the circumstances of each arbitration agreement to ensure that the employee's agreement to arbitrate meets certain standards before the court will enforce that agreement. Although the standards vary somewhat among jurisdictions, most courts require that an employee's agreement to arbitrate employment-related disputes be both express and knowing before the court will enforce it.

Several recent cases reinforce these requirements and provide guidance for employers seeking to implement enforceable employment arbitration agreements; this article highlights those cases.

Employee Acknowledgement Of Handbook and Arbitration Agreement

Many employers that promulgate employment arbitration policies obtain employee agreement to those policies in conjunction with the employee's acknowledgment of receipt of the employee handbook. Three federal court decisions highlight the necessity of obtaining such express written agreement. These cases also serve as warning to employers: Where an arbitration policy is contained in an employee handbook that contains a disclaimer that the handbook is not an express or implied contract of employment, then the arbitration agreement should also be set forth in a separate document that is signed and dated by the employee.

In The Georgetown Club at Suter's Tavern, Inc. v. Salamanca, 2008 U.S. App. LEXIS 5758 (D.C. Cir. March 10, 2008), a terminated employee brought employment discrimination claims against his employer, and the employer sought to compel the employee to arbitrate his claims under the arbitration policy contained in its employee handbook. The employee, however, was never asked to sign, nor did he sign, a form acknowledging receipt of the handbook, despite twice receiving copies of the Manual containing the arbitration agreement ' once when he was hired, and once during his employment.

The federal district court, affirmed by the court of appeals, refused to compel arbitration, holding that a valid and enforceable arbitration agreement did not exist between the parties. By contrast, in another recent federal court decision from the District of Columbia,

In Martin v. Citibank, Inc., 567 F. Supp. 2d 36 (D.D.C. 2008), the court held that a valid and enforceable arbitration agreement did exist where the employee had an opportunity to review the arbitration policy contained in an employee handbook and also on the employer's intranet. Importantly, the employee agreed to be bound to the terms of the policy by signing an acknowledgment form explicitly acknowledging both the employee's receipt of the handbook and the employee's understanding that the arbitration policy in the handbook required the employee to submit employment claims to binding arbitration.

Finally, in Brennan v. Cigna Corp., 282 Fed. Appx. 132 (3rd Cir. June 18, 2008), the issue of whether employees had agreed to submit employment disputes to arbitration was again placed front and center. In Brennan, the employer distributed its arbitration policy to all of its employees via inter-office mail, and later distributed an employee handbook that made clear that binding arbitration was a term and condition of their employment. The employer also disseminated an acknowledgment form by which an employee acknowledged that the handbook had been received and reviewed, and each of the employee-plaintiffs signed the acknowledgment form. The court held that because the employees had all received a copy of the arbitration policy and had signed and returned the acknowledgement form specifically indicating their assent to the policy, they were bound by the agreement to arbitrate and could not maintain their claims in federal court.

An Evolving Frontier

Electronic Agreement to Employment Arbitration Agreements

Another recent decision serves as a cautionary tale to employers that wish to ease the administrative burden of having employees acknowledge their receipt and understanding of, and assent to, arbitration agreements on paper by permitting or requiring employees to do so electronically.

In Kerr v. Dillard Store Services, Inc., 2009 U.S. Dist. LEXIS 11792 (D. Kan. Feb. 17, 2009), the employer required its employees to memorialize their arbitration agreements by executing electronic arbitration agreements through the employer's Intranet computer system. The system was available only to employees, and each employee could only access the system by a unique and confidential password created by and known only to him or her. Employee passwords were kept strictly confidential, but supervisors could log into an employee's account by resetting the employee's password and logging in under the employee's default password.

For several months, the plaintiff-employee's supervisors repeatedly asked the employee to execute the arbitration agreement electronically, but the employee refused to do so on each occasion.

Upon close examination of the facts, the court determined that the employer did not have adequate procedures to maintain the security of Intranet passwords, to restrict authorized access to the screen that permitted electronic execution of the arbitration agreement, and to determine whether electronic signatures were genuine. Accordingly, the court held that it was possible that the employee's supervisor or another individual signed onto the employer's Intranet system and electronically signed the arbitration agreement. Noting that it was the employer's burden to prove that the employee actually executed the arbitration agreement, the court refused to enforce the agreement.

Back to Basics

Even for Bigwigs: Binding Partners, Employee/Shareholders, and Executives to Employment Arbitration Agreements

Companies have long required partners, employee/shareholders, and high-ranking executives to submit claims arising from their employment to binding arbitration. Because such employees may be bound by a number of documents related to the business form and governance, however, it is important that the employer is careful to ensure that the agreement of a partner or other high-ranking individual in the organization to an employment arbitration provision contained in a business governance document such as bylaws, charters, and codes of business conduct and ethics, is express and knowing.

This very issue was confronted by the Third Circuit recently in Kirleis v. Dickie, McCamey & Chilcote, P.C., __ F.3d __, 2009 WL 750415 (Mar. 24, 2009). In Kirleis, the Third Circuit refused to enforce an arbitration clause in a law firm's bylaws against a shareholder in the firm because the shareholder did not explicitly agree to the arbitration clause. The employer argued that express agreement was unnecessary because the plaintiff's status as a shareholder put her on constructive notice of the arbitration provision in the firm's bylaws and implied her intent to be bound by it. The shareholder argued, however, that she was not bound by the agreement because she was never provided with a copy of the bylaws, was never informed of the arbitration clause in the bylaws and never signed any agreement or other document referring to or incorporating the arbitration clause.

The court refused to compel arbitration of the shareholder's claims because under Pennsylvania law “explicit agreement is essential to the formation of an enforceable arbitration contract,” and the employer had not demonstrated that the shareholder expressly agreed to the arbitration provision in the bylaws.

Conclusion

As employment arbitration agreements continue to grow in popularity, it is easy to lose sight of what is perhaps the keystone principle of an enforceable employment arbitration agreement: it takes “two to tango.” As the cases discussed in this article make clear, employers who fail to communicate their arbitration policies clearly to their employee and obtain their employees' knowing and express agreement to those policies risk facing the courtroom litigation that the employer sought to avoid. This basic principle of obtaining knowing and express employee agreement applies with equal force to arbitration agreements distributed electronically and those contained in business governance documents to which partners, employee/shareholders, and other high-ranking executives implicitly agree for all other purposes. Because the economy is weak and employment-related claims are on the rise, now is the perfect time for employers to re-evaluate whether their employment arbitration agreements are enforceable, and, if an employee files suit, whether the employer will be ready to “tango.”

Paul D. Snitzer, a member of this newsletter's Board of Editors, practices in Duane Morris' Philadelphia office in the area of labor and employment law. Christopher D. Durham practices in the same office. He advises clients on issues relating to employer-employee and management-union relations.

Many employers have recently developed and implemented employment arbitration programs. These programs are set forth in arbitration agreements with employees, and require employees to arbitrate, as opposed to litigate in court, disputes arising out of the employee's work with the employer. Countless employers have promulgated arbitration agreements to take advantage of the perceived benefits of arbitrating employment-related claims, including the absence of a jury, the efficiency of resolving claims in an arbitral forum and the reduced or eliminated publicity resulting from employment claims.

Pitfalls

There are, however, pitfalls awaiting employers who seek to implement employment arbitration policies that may prevent them from later enforcing those employment arbitration agreements. One such hazard to which employers fall victim is the erroneous assumption that a binding arbitration policy is no different from any other employment policy, and, therefore, can be unilaterally imposed on employees without their express agreement or even their knowledge. To the contrary, however, an employee who agrees to arbitrate employment-related disputes sacrifices important legal rights to which he or she is otherwise entitled, i.e., the right to file suit in federal and state court under a wide range of employment-related statutes.

Because employees give up important statutory rights when they agree to arbitrate claims arising from their employment, courts will closely scrutinize the circumstances of each arbitration agreement to ensure that the employee's agreement to arbitrate meets certain standards before the court will enforce that agreement. Although the standards vary somewhat among jurisdictions, most courts require that an employee's agreement to arbitrate employment-related disputes be both express and knowing before the court will enforce it.

Several recent cases reinforce these requirements and provide guidance for employers seeking to implement enforceable employment arbitration agreements; this article highlights those cases.

Employee Acknowledgement Of Handbook and Arbitration Agreement

Many employers that promulgate employment arbitration policies obtain employee agreement to those policies in conjunction with the employee's acknowledgment of receipt of the employee handbook. Three federal court decisions highlight the necessity of obtaining such express written agreement. These cases also serve as warning to employers: Where an arbitration policy is contained in an employee handbook that contains a disclaimer that the handbook is not an express or implied contract of employment, then the arbitration agreement should also be set forth in a separate document that is signed and dated by the employee.

In The Georgetown Club at Suter's Tavern, Inc. v. Salamanca, 2008 U.S. App. LEXIS 5758 (D.C. Cir. March 10, 2008), a terminated employee brought employment discrimination claims against his employer, and the employer sought to compel the employee to arbitrate his claims under the arbitration policy contained in its employee handbook. The employee, however, was never asked to sign, nor did he sign, a form acknowledging receipt of the handbook, despite twice receiving copies of the Manual containing the arbitration agreement ' once when he was hired, and once during his employment.

The federal district court, affirmed by the court of appeals, refused to compel arbitration, holding that a valid and enforceable arbitration agreement did not exist between the parties. By contrast, in another recent federal court decision from the District of Columbia,

In Martin v. Citibank, Inc. , 567 F. Supp. 2d 36 (D.D.C. 2008), the court held that a valid and enforceable arbitration agreement did exist where the employee had an opportunity to review the arbitration policy contained in an employee handbook and also on the employer's intranet. Importantly, the employee agreed to be bound to the terms of the policy by signing an acknowledgment form explicitly acknowledging both the employee's receipt of the handbook and the employee's understanding that the arbitration policy in the handbook required the employee to submit employment claims to binding arbitration.

Finally, in Brennan v. Cigna Corp. , 282 Fed. Appx. 132 (3rd Cir. June 18, 2008), the issue of whether employees had agreed to submit employment disputes to arbitration was again placed front and center. In Brennan, the employer distributed its arbitration policy to all of its employees via inter-office mail, and later distributed an employee handbook that made clear that binding arbitration was a term and condition of their employment. The employer also disseminated an acknowledgment form by which an employee acknowledged that the handbook had been received and reviewed, and each of the employee-plaintiffs signed the acknowledgment form. The court held that because the employees had all received a copy of the arbitration policy and had signed and returned the acknowledgement form specifically indicating their assent to the policy, they were bound by the agreement to arbitrate and could not maintain their claims in federal court.

An Evolving Frontier

Electronic Agreement to Employment Arbitration Agreements

Another recent decision serves as a cautionary tale to employers that wish to ease the administrative burden of having employees acknowledge their receipt and understanding of, and assent to, arbitration agreements on paper by permitting or requiring employees to do so electronically.

In Kerr v. Dillard Store Services, Inc., 2009 U.S. Dist. LEXIS 11792 (D. Kan. Feb. 17, 2009), the employer required its employees to memorialize their arbitration agreements by executing electronic arbitration agreements through the employer's Intranet computer system. The system was available only to employees, and each employee could only access the system by a unique and confidential password created by and known only to him or her. Employee passwords were kept strictly confidential, but supervisors could log into an employee's account by resetting the employee's password and logging in under the employee's default password.

For several months, the plaintiff-employee's supervisors repeatedly asked the employee to execute the arbitration agreement electronically, but the employee refused to do so on each occasion.

Upon close examination of the facts, the court determined that the employer did not have adequate procedures to maintain the security of Intranet passwords, to restrict authorized access to the screen that permitted electronic execution of the arbitration agreement, and to determine whether electronic signatures were genuine. Accordingly, the court held that it was possible that the employee's supervisor or another individual signed onto the employer's Intranet system and electronically signed the arbitration agreement. Noting that it was the employer's burden to prove that the employee actually executed the arbitration agreement, the court refused to enforce the agreement.

Back to Basics

Even for Bigwigs: Binding Partners, Employee/Shareholders, and Executives to Employment Arbitration Agreements

Companies have long required partners, employee/shareholders, and high-ranking executives to submit claims arising from their employment to binding arbitration. Because such employees may be bound by a number of documents related to the business form and governance, however, it is important that the employer is careful to ensure that the agreement of a partner or other high-ranking individual in the organization to an employment arbitration provision contained in a business governance document such as bylaws, charters, and codes of business conduct and ethics, is express and knowing.

This very issue was confronted by the Third Circuit recently in Kirleis v. Dickie, McCamey & Chilcote, P.C. , __ F.3d __, 2009 WL 750415 (Mar. 24, 2009). In Kirleis, the Third Circuit refused to enforce an arbitration clause in a law firm's bylaws against a shareholder in the firm because the shareholder did not explicitly agree to the arbitration clause. The employer argued that express agreement was unnecessary because the plaintiff's status as a shareholder put her on constructive notice of the arbitration provision in the firm's bylaws and implied her intent to be bound by it. The shareholder argued, however, that she was not bound by the agreement because she was never provided with a copy of the bylaws, was never informed of the arbitration clause in the bylaws and never signed any agreement or other document referring to or incorporating the arbitration clause.

The court refused to compel arbitration of the shareholder's claims because under Pennsylvania law “explicit agreement is essential to the formation of an enforceable arbitration contract,” and the employer had not demonstrated that the shareholder expressly agreed to the arbitration provision in the bylaws.

Conclusion

As employment arbitration agreements continue to grow in popularity, it is easy to lose sight of what is perhaps the keystone principle of an enforceable employment arbitration agreement: it takes “two to tango.” As the cases discussed in this article make clear, employers who fail to communicate their arbitration policies clearly to their employee and obtain their employees' knowing and express agreement to those policies risk facing the courtroom litigation that the employer sought to avoid. This basic principle of obtaining knowing and express employee agreement applies with equal force to arbitration agreements distributed electronically and those contained in business governance documents to which partners, employee/shareholders, and other high-ranking executives implicitly agree for all other purposes. Because the economy is weak and employment-related claims are on the rise, now is the perfect time for employers to re-evaluate whether their employment arbitration agreements are enforceable, and, if an employee files suit, whether the employer will be ready to “tango.”

Paul D. Snitzer, a member of this newsletter's Board of Editors, practices in Duane Morris' Philadelphia office in the area of labor and employment law. Christopher D. Durham practices in the same office. He advises clients on issues relating to employer-employee and management-union relations.