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Will Arbitration Provisions in Employment Contracts be Enforced? The Third Circuit Clarifies the Standard in Quilloin v. Tenet


April 5, 2012

Many employers routinely include arbitration provisions in their employment contracts or employee handbooks.  Should your organization have one?  If so, how can its provisions be made enforceable?  It will only be enforceable if the language is carefully and appropriately drafted.  In Quilloin v. Tenet Healthsystem Philadelphia, Inc., the Third Circuit continued to clarify the circumstances under which arbitration provisions in employment contracts will be enforced.

In Quilloin, the subject arbitration provision provided that:  the employee agrees to final and binding arbitration on any and all claims, - covering all disputes relating to or arising out of an employee's employment with the company or termination of employment; arbitration was the sole and exclusive remedy for any such claim; a waiver of the right to a trial by a jury; the employee's maximum out-of-pocket expense for the arbitrator and the administrative costs of the American Arbitration Association would be an amount equal to one day's pay (if the employee was exempt) or eight hours pay (if the employee was non-exempt); the request for arbitration must be made within one year, however, if there is a statute of limitations covering such claim, then the claim would be subject to the longer limitations period provided by the statute; fees and costs of the employee's legal counsel, as well as other expenses such as costs associated with witnesses or obtaining copies of hearing transcripts, would be borne by the employee; and no remedies would be forfeited.

The Plaintiff initiated the action by filing a Fair Labor Standards Act claim ("FLSA"), and the Defendant moved to compel arbitration under the employment agreement.  The district court refused to compel arbitration, concluding that the potential prohibition against recovery of attorneys' fees and costs, the potential inclusion of a class action waiver, and the possibility that Tenet could "run out the clock" on the statute of limitations were not enforceable.  Tenet appealed.

The Third Circuit Court of Appeals held that the arbitration provisions cited by the district court were not substantively unconscionable so that the employee had to proceed to arbitration on her claims.  In upholding the arbitration agreement, the Third Circuit found that even though the contract was ambiguous - on one hand, providing that the employee had to pay for its legal fees and, on the other hand, giving the arbitrator the power to award any remedy the employee would have under law - the arbitrator had the power to resolve the ambiguities.

As for the potential inclusion of a class action waiver, the Third Circuit relied on the recent Supreme Court decision in AT&T v. Concepcion finding class action waivers are not substantively unconscionable in certain circumstances.  Regarding the statute of limitations arguments, the Third Circuit found the guidelines in the arbitration agreement were reasonable, and, if it appeared that Tenet was intentionally delaying the matter, the employee could move to compel arbitration.

Practically speaking, this decision confirms that in order for an arbitration provision to be enforceable, it cannot take any substantive rights away from employees, such as their right to obtain attorneys fees.  In addition, the cost sharing provision provided in this agreement was unique - it limited what an employee would have to pay to one day's pay or eight hours pay depending on their status as exempt or non-exempt.  Since arbitration provisions are often struck down because of the cost provisions, this is a thoughtful way of handling that issue.  With the continuing increase of class actions under the FLSA, the FLSA class action waiver will continue to be refined.  The Quilloin decision confirms that reasonable guidelines regarding time limitations will be enforced.  Importantly, Quilloin instructs us that arbitration agreements should always include a provision giving the arbitrator the power to resolve any ambiguities in the agreement.