Giving Up Substantive Rights Renders Arbitration Agreement Unenforceable
 
July 3, 2001
 

Earlier this year, the United States Supreme Court made it clear that federal law permits employers and employees to enter into agreements to arbitrate, rather than litigate, workplace claims. However, employers who have entered into such arbitration agreements should take a hard look at the terms of those agreements to ensure that the agreements will be enforceable in light of federal civil rights law.

That is the lesson from a recent opinion by the Eleventh Circuit Court of Appeals, in a case called Perez v. Globe Airport Security Services, Inc. Perez and Globe entered into an arbitration agreement that required Perez to arbitrate all disputes relating to her employment, including disputes arising under laws against discrimination like Title VII of the Civil Rights Act. The agreement also provided that the costs and fees associated with any arbitration proceeding would be shared equally between Perez and Globe and precluded Perez from recovering those costs and fees from Globe if she prevailed in the arbitration - a right Perez would otherwise have under Title VII.

After her employment ended, Perez filed a lawsuit in federal district court alleging a claim against Globe for gender discrimination in violation of Title VII. Globe asked the district court to compel Perez to pursue her claim in arbitration instead of through her lawsuit, but the district court refused.

On appeal, the Eleventh Circuit found that the cost and fees provision in the arbitration agreement was an attempt by Globe to defeat Perez's Title VII right to obtain costs and fees upon prevailing and as such, tainted the entire arbitration agreement and rendered it unenforceable. The court refused to sever the costs and fees provision from the remainder of the arbitration agreement, indicating that an agreement that "contains provisions that defeat a federal statute's remedial purpose" is not enforceable.

The Perez court noted that an employee does not, by agreeing to arbitrate a claim under the employment discrimination laws, forgo the substantive rights provided by those laws - and an employer cannot enforce an agreement that requires an employee to waive those substantive rights.

As a result of the decision in Perez, employers should carefully review any arbitration agreements currently in use, to ensure that the agreements are legally enforceable and do not seek to preclude substantive rights provided by the employment discrimination laws. Most employers are likely to find it far more cost-effective to assume financial responsibility for the costs and fees associated with arbitration of employee claims than to risk a judicial finding that the employer's arbitration agreements are unenforceable.

For more information please contact Eric K. Gabrielle at 1-888-688-8500 or at egabriel@hklaw.com.