Arbitration in employment law disputes

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Employers desiring to arbitrate employment law disputes were dealt a setback last month by the United States Supreme Court in Equal Employment Opportunity Commission v. Waffle House, 2002 U.S. LEXIS 489 (2002). In Waffle House, the Court ruled that the EEOC could pursue victim-specific relief in court on behalf of employees, despite the existence of a valid binding arbitration agreement.

As a condition of employment, Waffle House requires all potential employees to sign an employment application that contains an arbitration provision. The arbitration provision states in pertinent part: “The parties agree that any dispute or claim concerning Applicant’s employment with Waffle House, Inc., or any subdivision or Franchisee of Waffle House, Inc., or the terms, conditions or benefits of such employment, including whether such dispute or claim is arbitrable, will be settled by binding arbitration.”

On June 23, 1994, Scott Baker applied for employment with Waffle House and signed Waffle House’s employment application which contained the aforementioned arbitration provision.

Baker began working for Waffle House on August 10, 1994. On August 26, 1994, Baker suffered a seizure and went home for the day. Baker alleged that his manager told him not to report to work because of his disorder, and, on September 5, 1994, Waffle House terminated Baker’s employment. Baker filed a complaint with the EEOC, alleging that his discharge violated the Americans with Disabilities Act (“ADA”).

After an unsuccessful conciliation, the EEOC filed a complaint against Waffle House in the United States District Court for the District Court of South Carolina seeking: (1) injunctive relief, (2) an order mandating that Waffle House institute and carry out nondiscriminatory policies; (3) back pay and reinstatement of the employee; (4) compensation for pecuniary and non-pecuniary losses suffered by the employee; and (5) punitive damages.

Ultimately, the Court of Appeals for the Fourth Circuit held that the EEOC could not seek victim-specific relief such as back pay, reinstatement, and compensatory and punitive damages, as those were barred by the arbitration provisions of the employment application.

However, the Court of Appeals stated that the EEOC, based on its public enforcement role, could seek injunctive relief and mandate that Waffle House institute and carry out nondiscriminatory policies. The Supreme Court granted the EEOC’s petition for a writ of certiorari to resolve whether the EEOC could seek victim-specific relief.

Justice Stevens delivered the opinion of the Court, and was joined by Justices O’Connor, Ginsburg, Kennedy, Souter and Breyer. The Court stated that the EEOC may seek the same remedies that are set forth in Title VII of the Civil Rights Act of 1964.

Title VII was amended in 1991 to allow the recovery of compensatory and punitive damages by a “complaining” party. Therefore, the Court concluded: “As a complaining party, the EEOC may bring suit to enjoin an employer from engaging in unlawful employment practices, and to pursue reinstatement, back pay, and compensatory or punitive damages. Thus, [Title VII and the ADA] unambiguously authorize the EEOC to obtain the [victim-specific] relief that it seeks in its complaint if it can prove its case against [Waffle House].”

The Court also ruled that the EEOC was not bound by the arbitration agreement between Waffle House and Baker. The Federal Arbitration Act (“FAA”) provides that a written provision in “a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract … shall be valid, irrevocable, and enforceable.” In Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001), the Court ruled that employment contracts, except for those covering workers engaged in transportation, are covered by the FAA. However, the Court stated that nothing in the FAA “authorizes a court to compel arbitration of any issues, or by any parties, that are not already covered in the agreement.”

Therefore, the Court concluded “because the EEOC is not a party to the contract [between Baker and Waffle House] and has not agreed to arbitrate its claims, the FAA’s proarbitration policy goals do not require the agency to relinquish its statutory authority to pursue victim-specific relief, regardless of the forum that the employer and employee have chosen to resolve their disputes.”

The Court ultimately concluded that the EEOC was the “master of its own case” and it is the EEOC’s authority “to determine whether public resources should be committed to the recovery of victim-specific relief.”

Justice Thomas filed a dissenting opinion, in which Chief Justice Rehnquist and Justice Scalia joined. Justice Thomas argued that the EEOC should take a victim of discrimination as it finds him. He concluded that the Court’s decision was contrary to the FAA and that the Court’s failure to give effect to the arbitration agreement between Baker and Waffle House allowed the EEOC “to reduce that arbitration agreement to all but a nullity.”

What is the practical impact of the Court’s decision in Circuit City and Waffle House on the use of arbitration agreements to resolve employment law disputes≠ In Circuit City, the Court held that the plaintiff employee was bound by the terms of an arbitration agreement and was precluded from pursing claims in federal court. However, the Court’s decision in Waffle House clearly states that the EEOC is not bound by the terms of an arbitration agreement to which it is not a party and further allows the EEOC to pursue victim-specific remedies in federal court.

Some commentators have stated that the Court’s decision in Waffle House “may be the death knell for mandatory arbitration agreements [in the employment law context].” However, I do not agree with this overreaching opinion.

The Court noted in Waffle House that the EEOC files less than two percent of all discrimination claims filed in federal court. Furthermore, even among the cases where it finds reasonable cause, the EEOC files suit in less than five percent of those cases. Therefore, it is significantly more likely that a plaintiff employee would receive a right to sue letter and proceed in federal court on his or her own behalf.

In the unlikely event that the EEOC seeks victim-specific relief in federal court, an arbitration agreement would not preclude the EEOC from taking such action. However, based on the Court’s decision in Circuit City, an enforceable arbitration agreement would mandate the arbitration of claims where the plaintiff was seeking relief in federal court on his or her own behalf. Therefore, I continue to recommend using a well-drafted arbitration agreement, as it will be enforceable in the vast number of employment law claims.

Edward J. Steve is an associate at Boylan, Brown, Code, Vigdor & Wilson, LLP and practices in the area of general corporate law, with a concentration in employment law.