Enforcing arbitration agreements between employers and employees.

• Author: Knight, Jeffery R.

The Supreme Court and lower federal courts are moving toward enforcement of employer-employee arbitration clauses, but some doubts remain

Arbitration offers employers a method of resolving disputes with employees that has a number of advantages over litigation. It is faster and less expensive than a court proceeding, it is less likely to generate negative publicity, and it eliminates the employer's exposure to a potentially hostile forum.

But employees, perceiving that arbitration may produce less favorable results than traditional litigation, frequently pursue their employment-related disputes in court despite having signed an arbitration agreement. Employers respond to this litigation by insisting that the Federal Arbitration Act requires the court to stay the proceeding and order the employee to arbitrate in accordance with the signed agreement.

The enforceability of arbitration agreements between employers and employees under the FAA, 9 U.S.C. [subsections] 1-14, is an unresolved and highly contested issue because of a provision in the act that renders at least some agreements unenforceable. Lower courts generally construe the provision broadly, making most employment-related arbitration agreements enforceable. Although the U.S. Supreme Court has not decided the issue, the Court's most recent pronouncement in Gilmer v. Interstate/Johnson Lane Corp.(1) suggests that it is inclined toward the lower court view. Gilmer also shows that the Court is no longer open to general challenges to the adequacy of arbitration as a method of resolving employment-related disputes. It therefore appears that arbitration agreements between employers and employees generally are enforceable.

Moreover, Gilmer casts serious doubt on the continuing validity of an earlier line of Supreme Court cases that effectively granted employees an absolute right to litigate against their employers, regardless of any agreement to arbitrate, if the dispute involved a federal statutory claim. The circumstances under which an employee can avoid a signed arbitration agreement thus appear to be extremely limited.

Applicability of FAA

1. The FAA and Section 1

   The Federal Arbitration Act was first enacted in 1925 and then re-enacted and codified in 1947 as Title 9 of the United States Code. Prior to its enactment, courts routinely held that arbitration agreements were unenforceable, whether they were between businesses, individuals, or employers and employees. The principal reason for non-enforcement has been described as an "irrational judicial hostility to arbitration in general."(2) It is well established that the FAA's purpose was to end this judicial hostility and make arbitration agreements as enforceable as other contracts.(3)

   The FAA covers all types of commercial arbitration agreements, not just those between employers and employees. It provides (9 U.S.C. [sections] 2):

   A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.

   The act calls for stays of proceedings in federal district courts when an issue in the proceeding is referable to arbitration, 9 U.S.C. [sections] 3, and for orders compelling arbitration when one party has failed to comply with an arbitration agreement, 9 U.S.C. [sections] 4.

   The applicability of the FAA to arbitration agreements between employers and employees is unclear because of the provision in Section 1 of the act that renders it inapplicable to "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." Section 1 clearly makes arbitration agreements unenforceable if the employees are seamen or railroad employees. The issue courts have struggled to resolve is which additional employment-related arbitration agreements are unenforceable because the employee belongs to a "class of workers engaged in foreign or interstate commerce."

   A narrow reading of the clause would limit the exception to employees who, like seamen and railroad workers, are actually engaged in moving goods. An expansive reading would make virtually all arbitration agreements between employers and employees unenforceable, because almost all employees are in some way engaged in foreign or interstate commerce.

2. Trend in Lower Courts

   A number of early cases in the lower courts,(4) as well Justice Stevens's dissent in Gilmer, construed Section 1 broadly to include almost all employment contracts.(5) The prevailing view among lower courts today, however, limits Section 1 to the employment contracts of workers who, like seamen and railroad employees, are employed in the transportation industry.(6) These courts often cite the "liberal federal policy favoring arbitration agreements"(7) embodied in the FAA as the reason for limiting Section 1 to employees engaged in the actual movement of goods.

   Courts also turn to the legislative history of the FAA. Although the legislative history is not entirely clear, and Justice Stevens read it in Gilmer as exempting all workers from arbitration agreements, most courts agree that the legislative history supports a narrow reading of Section 1. In particular, there seems to be general agreement in the case law that Section I was included in the FAA to placate the Seamen's Union.(8) This fact has been used to support a narrow reading of Section 1. If the concern driving the Seaman's Union was to exempt its members from compulsory arbitration agreements, the argument goes, and the Seaman's Union was driving Congress, then Section 1 must not contemplate a larger group of employees.

   Statutory construction also seems to favor a narrow reading of Section 1. As noted by at least one court, "if Congress had intended to exclude all employment contracts from the Act, it would have been unnecessary to identify specific categories of workers."(9)

3. Supreme Court Decides Not to Decide?

   It was anticipated that the Supreme Court would resolve the scope of Section 1 in Gilmer, but the Court explicitly left the issue undecided.(10)

   The plaintiff, Robert D. Gilmer, was a senior vice president at Interstate/Johnson Lane Corp., a North Carolina brokerage firm. As required by Interstate, Gilmer had registered with the New York Stock Exchange as a securities representative shortly after being hired. The registration application included an agreement to arbitrate all disputes with his employer. Gilmer filed suit against Interstate under the Age Discrimination in Employment Act when he was dismissed in 1987 at the age of 62. In response, Interstate filed a motion to compel arbitration.

   The Supreme Court, in a 7-2 decision, held that Gilmer's age discrimination claim was subject to compulsory arbitration pursuant to the arbitration agreement in the registration application. The Court concluded that whatever the scope of Section 1 might be, it did not apply to Gilmer because he had signed a contract with the stock exchange, not an employment contract with Interstate. Gilmer was thus compelled to arbitrate his claim against Interstate.

   When squarely presented with the issue in the future, Gilmer certainly leaves room for the Court to adopt either a broad or narrow reading of Section 1. Nevertheless, the seven-justice Gilmer majority seemed inclined toward a narrow reading. The majority's assertion that the NYSE registration form signed by Gilmer was not a contract of employment within the meaning of Section I may be true in a highly formalistic sense, but it is a distinction without a difference as to the arbitration issue. Gilmer was required by his employer as a condition of employment to sign the registration form, and the Court permitted Interstate to enforce the clause. While it could be argued that Interstate's authority to enforce the arbitration agreement came from its status as a third-party beneficiary of the registration form, as far as the arbitration issue goes, the registration form was indistinguishable from an employment contract. The employer required it and was allowed to enforce it.

   Thus, despite the Court's statement leaving the scope of Section 1 undecided, Gilmer seems to favor a narrow reading. The alternative...