The Arcane World of Arbitration

A mechanic working for a corporate aviation activity called me recently and asked about arbitration agreements. He said he was required to sign an arbitration agreement, as part of a dispute resolution program adopted by his employer. Pilots were also required to sign the agreement. This prompted an inquiry from the mechanic. Should he sign it? Is it enforceable? Will they fire me if I don’t sign it? These questions prompted a look at the requirements and necessity of an arbitration agreement with his employer. The key issues are whether he should sign it and whether it is enforceable.
Arbitration agreements are very popular today. You find them everywhere from the doctor, dentist, or hospital you visit to consumer goods purchases.

Employers use them in company dispute resolution programs. Employers want to avoid lawsuits by employees. Lawsuits consume too much time and money and therefore are to be avoided, if possible, by the use of mandatory arbitration agreements. These agreements usually provide your exclusive remedy to address employment grievances. Most employers require you to sign the agreement as part of the employment process. However, many employers who never had an arbitration process are now requiring employees to sign such agreements.

Arbitration is simply a matter of submitting a dispute to an agreed upon person (the arbitrator) for a decision on the dispute. Arbitration is a nonjudicial dispute resolution process.

An arbitration agreement is nothing more or less than a contract between you and your employer to settle all of your employment grievances by arbitration. The arbitration process generally provides for a prompt resolution of any employment problems and saves money that would be spent in a formal legal proceeding.

A typical portion of the agreement would be as follows:

“Except as otherwise provided in the Dispute Resolution Program, neither you nor the company will initiate or pursue any lawsuit or administrative action in any way related to or arising from any claim covered by this program.”

“An employee must give written notice of any claim to the company along with a demand for mediation (or arbitration) within one year from when the basis of the claim is known or should have been known … Failure to give timely notice of a claim, along with a demand for mediation will waive the claim and it will be lost forever.”

Of course, not every employee gets involved with arbitration agreements. Where you are a member of a union or other collective bargaining unit, your union provides a process to handle complaints. Other federal laws like the Railway Labor Act and the National Labor Relations Board overlap employment agreements and provide broad remedies and procedures to govern labor relations in the air carrier field and other transportation areas.

In addition, employment arbitration agreements must exclude federal administrative complaints of discrimination. You must file these complaints with the Equal Employment Opportunity Commission (EEOC). State complaints filed with agencies, such as the California Department of Fair Employment and Housing and the New York Human Rights Commission and similar state agencies, are also excluded.

Complaints about workers’ compensation benefits and claims for unemployment compensation benefits, routinely filed with state agencies, are also excluded and filed with the appropriate state agencies.

The process
The way an arbitration agreement is looked at for legality and enforceability is when an employee files a lawsuit in a federal or state court alleging some sort of employment complaint. (The substance and merit of the complaint is not discussed here.) After a complaint is filed the employer responds, usually asking the court to dismiss the case and compel arbitration. The court may then dismiss the case and order arbitration in accordance with the agreement or allow it to continue in the formal legal process. The employee can appeal an order compelling arbitration, stating that the arbitration agreement is unenforceable because is it unconscionable, among other things, (word of art … means unreasonable, excessive, and unfair and therefore should be set aside because it violates basic contract law).

It should be recalled that the arbitration process as compared to the courthouse litigation process usually removes a lot of leverage on the part of the complainant and thus is perceived by many as favoring the employer’s position rather than the employee. However, who has the advantage depends largely on the nature of the complaint and the damages involved.

Another usual key element of an arbitration agreement is the very important confidentiality clause. Employers like to include this part simply because it keeps the information about your complaint private. Formal legal proceedings are public documents and are available for all to see. There is no confidentiality in a typical formal judicial process and trial.

Confidentiality provisions usually favor companies over the individual. Because companies tend to arbitrate the same claims over and over again, the process tends to favor the company. The confidentiality provision is considered by some courts as a “gag order.”

A typical confidentiality clause in an arbitration agreement follows:

“All claims, defenses, and proceedings, including the existence of a controversy and the fact that there is mediation or arbitration proceeding in existence, shall be treated in a confidential manner by the mediator, the arbitrator, the parties and their counsel, their agents and employees, and all others acting in concert with them . . .”

This provision is clearly designed to keep the claim quiet and information about it from other employees who might be interested in such a claim themselves. The company would feel that the less people who knew about the claim the better off the employer would be. Some courts have found this provision to be oppressive by itself.

Courts outline defects in confidentiality as follows. The company is placed in a far superior position (with confidentiality) by ensuring that none of any potential follow-on employees have any access to the details and precedent value of prior cases, while the employer accumulates a wealth of knowledge on how to negotiate the terms of its own unilaterally designed arbitration contract.

The unavailability of review of prior decided cases can prevent a plaintiff from obtaining the information needed to build a case of intentional misconduct or unlawful discrimination against an employee.

The inability to even mention the existence of a claim to current or former employees would handicap and even stifle an employee’s ability to investigate and engage in discovery. Additionally, California Labor Code forbids employers from keeping employees from disclosing certain “working conditions” and from retaliating against employees who do so. This statute in and of itself restricts confidentiality requirements.

California Labor Code: 232.5
“No employer may do any of the following: (a) Require, as a condition of employment, that an employee refrain from disclosing information about the employer’s working conditions. (b) Require an employee to sign a waiver or other document that purports to deny the employee the right to disclose information about an employer’s working conditions.”

Not the Federal Aviation Administration, rather the Federal Arbitration Act 9 USC describes the legality of arbitration agreements in the federal arena. State laws also address arbitration agreements. The act says that arbitration agreements …”shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract” 9 USC 2. The courts have said that the FAA fosters a liberal federal policy favoring arbitration agreements. However, arbitration agreements are not always valid. Courts should apply ordinary state law principles that govern the formation of contracts in order to determine validity.

Some general questions:

  1. Is the agreement a contract of adhesion? Adhesion means does the contract contain surprise or concealed factors? Was undue pressure imposed to sign? Is it oppressive?
  2. Is your only option to signing … leave and work somewhere else? Is there a meaningful opportunity to “opt out?”
  3. Is it a “take it or leave it” proposition?
  4. Are the terms of the agreement negotiable?
  5. Is a traditional judicial forum (lawsuit) preserved for those who “opt out”?

Refusing to sign the agreement
Where you are required to sign an arbitration agreement as a condition of employment or for continued employment, there is a good basis to find the agreement oppressive and nonenforceable, if and when that becomes necessary. On the other hand, few employees are usually in a position to refuse a job because of an arbitration agreement in an employment contract. If the employee has been on the job for some time, then it is clear that he or she is not in a position to give up seniority and earned benefits in order to avoid signing such an agreement.

Practical considerations
As a practical matter you probably will not be fired or laid off if you choose not to sign an arbitration agreement. You may have no reason during your employment to even use the arbitration process. You may be perfectly content with the goings on at your company and have no reason to file a complaint. There is no point in raising the issue of enforceability at the time you are asked to sign the agreement. So why raise the issue when asked to sign when there is no reason?

When my man asked if he should sign I said sure. What’s the difference? There is no immediate downside to signing the contract and there may never be one. If and when a need should arise to attack the arbitration agreement, that’s the time to raise the issues, file your case, and attack the agreement in a formal judicial forum. Send your comments to

Stephen P. Prentice is an attorney whose practice involves FAA-NTSB issues. He has an A&P certificate and is an ATP rated pilot. He worked with Western Airlines and the Allison Division of GMC in Latin America, servicing commercial and military overhaul activities and is a USAF veteran. E-mail: