Top Court Strikes Blow To Arbitration

A U.S. Supreme Court ruling in Equal Employment OpportunityCommission v. Waffle House has added a degree of uncertaintyto the force of binding arbitration agreements between employersand employees in holding down the number of discriminationlawsuits, according to experts in employment law and employmentpractices liability insurance.

But with the EEOC taking up the cause of employees through legalaction in only a small minority of cases, the impact of thedecision may not be devastating, they say.

In its January ruling, the court held that an agreement toarbitrate employment-related disputes does not bar the EEOC fromgoing to court for victim-specific relief under the federalAmericans with Disabilities Act of 1990, explained Ivan Dolowich,senior vice president of Kemper Financial Insurance Solutions inBerkeley Heights, N.J. He added that the holding allows the EEOC torequest back pay, reinstatement, and compensatory and punitivedamages.

As a condition of employment, Waffle House Inc., based inNorcross, Ga., required employees to sign an agreement mandatingthat employment disputes be settled through binding arbitration.Eric Baker agreed to this in his application for a job at a WaffleHouse restaurant. In August 1994, 16 days after starting work as agrill operator, he suffered a seizure. After being fired a shorttime later, he filed a discrimination claim with the EEOC, allegingviolations of the ADA.

After investigating the claim and failing to conciliate, theEEOC filed suit against Waffle House. Mr. Baker was not a party tothat suit, nor did he seek to arbitrate his dispute or to enterinto settlement negotiations with Waffle House.

The EEOC complaint sought an injunction to “eradicate theeffects of past and present unlawful employment practices” byWaffle House. It also asked for back pay, reinstatement and damagesfor Mr. Baker.

In allowing the lawsuit to proceed, the court found that bothTitle VII of the Civil Rights Act of 1964 and the ADA“unambiguously” authorize the EEOC to obtain the type of relief itwas seeking if it can prove its case against an employer.

(Title VII prohibits employment discrimination based on race,national origin, color or gender. While the decision repeatedlyrefers to Title VII statutory and case law, technically, the courtdid not and could not extend its holding to Title VII cases, sinceWaffle House was decided in the context of only theADA.)

The court also found that the ADA specifically grants the EEOCexclusive authority over the choice of forum and the demand forrelief once an employee has filed a charge with the agency.

Joan M. Gilbride, an employment litigation specialist and memberof the New York law firm Kaufman, Borgeest & Ryan, called thedecision a “blow” for employers. In her view, the WaffleHouse decision means that “the EEOC can control the destiny ofa matter” once the agency is made a party to it. The EEOC becomes aparty only when an employee files a discrimination charge with theagency.

But Ms. Gilbride quickly added that she is advising her clientsnot to be too concerned about Waffle House. First, shesaid, the EEOC can pursue litigation as a party plaintiff onlyafter finding that probable cause exists for the filing of alawsuit. Second, even when the EEOC finds probable cause,statistics show that the agency gets involves in litigation “in avery small percentage of cases,” she said.

Mr. Dolowich concurred on this point. He noted that both theWaffle House majority opinion and the EEOC Web siteindicate that the agency found probable cause in about 10 percentof the nearly 80,000 discrimination charges filed in 2000. But theEEOC itself filed only 291 lawsuits and intervened in 111 otherlawsuits. In contrast, roughly 21,000 employment suits were filedin 2000 by private-party plaintiffs.

As noted in Waffle House, this means that the EEOCfiles less than 2 percent of all employment discrimination claimsin federal court.

Nevertheless, Mr. Dolowich believes the Waffle Housecase has several implications for EPL insurers and employers. Withrespect to large EPL risks, he said that the EEOC will probablybecome more involved in the larger cases due to “prodding” byplaintiffs' attorneys.

Mr. Dolowich also believes that EPL insurance policies will havehigher deductibles. Additionally, some insurers may start offeringsplit retentions, he said. Under this scenario, there would be onedeductible for class EEOC and multi-party cases, and anotherdeductible for individual cases, he explained.

Mr. Dolowich also thinks that more charges will be filed “in thehopes the EEOC will pick up the case.” But he added that the EEOCwill probably continue to intervene only in the most egregiouscases or where it can “effectively show a pattern or practice ofsystematic discrimination.”

Mr. Dolowich said that Kemper and other EPL insurers–along withthe EEOC–will be paying “extremely close attention” to whetheremployers have the appropriate anti-discrimination complianceprograms in place. Such programs help establish an affirmativedefense in the event that an employee files charges against theemployer, he noted.

Both Ms. Gilbride and Mr. Dolowich admitted that in terms ofdrafting arbitration clauses, there is little an employer can do tocircumvent Waffle House.

“It's already law that you can't force people to give up theirright to proceed on an EEOC claim,” Ms. Gilbride stated. Therefore,in advance of a dispute, “there's nothing you can do to prevent thefiling of an EEOC claim–not that I've come up with yet, anyway,”she said.

However, she said that after a dispute has erupted, an employerwho, for example, seeks to terminate an employee may be able tooffer a severance package or some other incentive in exchange for arelease of the EEOC claim.

Mr. Dolowich added that the EEOC is not a party to sucharbitration agreements, and enjoys broad statutory powers thatcannot be changed or usurped by redrafting the arbitrationagreements. At any rate, he said, Kemper would not want itsinsureds to try such a redraft.

Based on how the U.S. Supreme Court has acted in the past insimilar situations, both Mr. Dolowich and Ms. Gilbride believe thatWaffle House could be extended to Title VII employmentdiscrimination cases. But overall, Ms. Gilbride said it is“absolutely” valuable for firms to continue including arbitrationclauses in employment contracts.

Similarly, Mr. Dolowich believes that because the EEOC involvesitself in so few cases, arbitration will still be “extremelyvaluable in most circumstances.” In fact, he predicted that mostagreements will go unchallenged.

Therefore, he expects employers to continue to use arbitrationclauses extensively, because arbitration is generally “the mosteffective forum for resolving employment disputes quickly and costeffectively.”

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, May 20, 2002.Copyright 2002 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.