Employment-related claims could be on the rise after a recentU.S. Supreme Court decision determined that a collective-bargainingagreement which “clearly and unmistakably requires union members”to arbitrate age discrimination claims is enforceable as a matterof federal law.

The decision in 14 Penn Plaza LLC et al. v. Pyett(April 2009) comes on the heels of a U.S. Equal EmploymentOpportunity Commission announcement that job discrimination claimsare at their highest since the agency was formed in 1965.

The plaintiffs in the court casewere former unionized lobby watchmen in a New York City officebuilding, whose duties were reassigned, rendering them porters andcleaners. These employees claimed age discrimination, ultimatelyfiling a federal lawsuit against both their employer and the ownerand operator of the office building.

The Supreme Court ruled 5-to-4 that a labor organization mayrelinquish its union members' right to sue their employer fordiscrimination, requiring instead resolution through bindingarbitration. In other words, the union members were precluded frombringing their claims before the EEOC, state human relationsagency, or in a court of law.

This ruling overturns prior case law, which held that acollective bargaining agreement did not act as a waiver of thecovered employees' right to pursue employment discrimination claimsin state court, or with the various federal, state and localagencies that receive and investigate claims of discrimination.

Employers and unions now have to decide if they want to includeindividual employment claims in their collective bargainingagreements, including employment discrimination, sexual harassment,wrongful discharge, negligent infliction of emotional distress andthe like. Should such claims be negotiated into a union contract,unions may become more vigilant in protecting their members' rights(at the risk of being sued by their members for unfairrepresentation).

Bottom line: expect employment claims to rise and employers tocarefully evaluate whether they have adequate coverage under anemployment practices liability insurance policy.

Prudent employers ordinarily depend upon an EPLI policy toprotect them from damages arising out of charges of discriminationby their employees. Such policies usually cover the expense ofretaining an employment law attorney to defend such claims andreimburse the company for any judgments and settlements.

But the court's ruling, which is coming at a time when there isa virtual explosion in the number of charges, complaints andlawsuits filed by employees against their employers, have businessowners concerned that their EPLI policies may be inadequate tocover the anticipated increased potential for exposure toliability.

For instance, plaintiffs who previously were able to seek allavailable remedies in pursing a discrimination claim may now bebound to process all disputes exclusively through the collectivebargaining agreement's grievance procedure, potentially resultingin binding and final arbitration if the union pursues thegrievance.

While this may seem like a victory for business owners, it couldleave them vulnerable.

Many EPLI policies exclude coverage for such “labor disputes,”even though the core claim may be sounding in discrimination.

In addition, union arbitration is usually not the most effectivemanner in which to resolve claims, particularly those involvingdiscrimination. While the alternative dispute resolution methodoffers positives–such as informality, simplified rules andprocedures, cost and speed of decision–arbitration is plagued withdisadvantages.

Arbitrators are notorious for King Solomon-type decisions, whichensure he or she will be selected by one or both parties toarbitrate another dispute. Extensive discovery is absent in mostarbitrations, so the summary judgment motion is almost always notviable.

There is also a significant level of uncertainty regarding howan arbitrator might rule. This makes many employers naturallyuncomfortable.

The absence of formal pleadings and prehearing motions can makeit difficult for the arbitrator to know what the real issues areuntil the case is fully presented. Arbitrators generally leantoward including rather than excluding evidence, so it is commonfor “inadmissible” evidence to be admitted.

Arbitrators also have varied backgrounds, training andabilities, so there are differences in their abilities andwillingness to “disregard” evidence that turns out to be irrelevantor immaterial, as well as understand the laws involved.

Finally, the ability to successfully appeal an arbitration awardis limited.

Employers must be vigilant. Many insureds are under the falseimpression that an EPLI policy alone can effectively substitute forestablished risk management procedures that enable an employer toprevent employment-related claims.

Regardless of the court's ruling, the focus should always be onpreventing complaints, grievances and lawsuits from ever proceedingto an adjudicatory stage. Yet, many organizations, including smallbusinesses and nonprofit groups that lack a full-fledged humanresources department, do not understand the proactive measures thatneed to be put in place, monitored and updated when necessary.

Such measures include regular communications with employeesregarding policies and procedures. Supervisors who undergo formalEEO training at least every other year is mandatory. In addition tohelping supervisors and managers identify potential problems, thisoften inexpensive training provides the employer with anaffirmative defense if sued by an employee.

With policies properly established and communicated, employeeswho feel they have experienced any form of discrimination knowthere are procedures in place to handle complaints. Employers alsoensure that supervisors and managers understand precisely what kindof behavior constitutes discrimination, including sexualharassment. What's more, they make it clear that the company willnot tolerate any such conduct.

Michael A. Kaufman is managing partner in theWoodbury, N.Y. office of Kaufman Dolowich & Voluck andPhilip R. Voluck is managing partner in the BlueBell, Pa. office of the firm. Mr. Kaufman can be reached at[email protected] andMr. Voluck can be reached at [email protected].