Employee Disputes: Avoiding Court

Are you within your rights to require employees to sign a binding arbitration agreement?
Magazine Contributor
3 min read

This story appears in the October 2003 issue of Entrepreneur. Subscribe »

Getting sued by your own employees is a drain on your business's resources. That's why many companies require employees to sign an agreement waiving their right to sue over employment disputes. Instead, any dispute must go before a panel of arbitrators, who listen to both sides and decide how to resolve the problem. It's cheaper and faster than a lawsuit.

From the employee's point of view, though, arbitration can feel like second-rate justice. Often, the arbitration agreement requires whoever loses to pay for the cost of the arbitration, which can run tens of thousands of dollars. The employee has less access to company records than in litigation, making it harder to dig up evidence. And a panel of arbitrators familiar with employee relations may be harder to sway than a jury.

Accordingly, employees don't always sign such agreements happily. Take the case of Donald Lagatree, a legal secretary. Lagatree had been working for a San Francisco law firm for three years when the firm asked all employees to sign an arbitration agreement. Lagatree refused and was fired. After accepting a job at a second law firm, he found they also wanted an arbitration agreement. When he refused to sign, the firm withdrew its offer. Lagatree sued both firms for wrongful termination, claiming it violates public policy to require people to waive their right to sue. California state courts dismissed both lawsuits, and a U.S. Court of Appeals agreed. The appellate judges noted that, in both civil and criminal cases, people routinely waive their right to a jury trial, so it's not a violation to require employees to do so if they want a particular job.

Lagatree won't give up. He enlisted the EEOC to sue in federal court, claiming the firms unlawfully retaliated against him by terminating him for exercising his civil right to a jury trial. The retaliation angle is new, and it's in a sympathetic jurisdiction. The 9th U.S. Circuit Court of Appeals, which includes California, is the only circuit that has ruled, on a prior case, that arbitration agreements are not enforceable on Title VII discrimination claims when required as a condition of employment. Last November, a three-judge panel overturned that ruling, and the full court has yet to rehear it.

In the meantime, make sure if you require employees to sign an arbitration agreement that it's as fair as possible. It should be equally binding on both sides, and the employee must have read, understood and signed it. Make sure there's a reasonable procedure for discovery of evidence, such as the one established by the American Arbitration Association. And in some jurisdictions, it's important that employees receive some "consideration" for signing it, such as being hired in the first place or getting a pay raise. If they don't like it, they don't have to take the job.

Jane Easter Bahls is a writer in Rock Island, Illinois, specializing in business and legal topics.

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