When Installing an ADR With Arbitration, Make Sure It’s Done Right - American Society of Employers - Michael Burns

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When Installing an ADR With Arbitration, Make Sure It’s Done Right

Alternative Dispute ResolutionAlternative Dispute Resolution (ADR) systems are probably not used as much these days as they should be by employers. That said, a Sixth Circuit Court of Appeals decision handed down this month demonstrates how a poorly thought-out ADR system did not help the employer as it should have.

Arising from an employee lawsuit claiming that the employer failed to pay overtime, provided untimely payment, withheld wages, failed to provide statements of wage deductions, and didn’t provide meal and rest periods; the employer moved to remove the lawsuit from the courts and arbitrate the complaints as stated in the employee application form and in the employee handbook.

The employer included various ADR provisions that it alleged included an agreement to arbitrate such claims rather than settle them in court. However, first at the District Court level and then at the Sixth Circuit Court of Appeals, both courts could not find a properly set-up agreement dictating arbitration as prescribed by the Federal Arbitration Act (FAA) and subsequent case law.

The employer’s application for employment stated only:

“As a condition of employment, I accept that any complaint or conflict that cannot be resolved internally may be referred to Alternative Dispute Resolution, unless prohibited by law, before any other legal action is taken.”

And the employee handbook stated:

“As an employee of Newcomb Oil Co., you agree to Alternative Dispute Resolution, a forum or means for resolving disputes, as arbitration or mediation, that exists outside the state or federal judicial system, unless prohibited by law, as a means to resolve any disputes and/or complaints that cannot be resolved internally.”

And the final page of the handbook finished with:

“If there is a conflict that cannot be resolved between the employee and the company, both agree that the matter will be referred to mediation.”

All statements evidenced of some intent to settle matters out of court, but the Sixth Circuit found they were not sufficient to establish final binding arbitration as a method to settle the legal issues at hand. Rather than binding arbitration, an Alternative Dispute Resolution process, the employer put mediation as its final step. Mediation is not a system that necessarily results in resolution of a dispute but has a third party help two parties to reach an agreeable solution. This is very different than binding arbitration.

Because the Sixth Circuit could not find any arbitration agreement to enforce, the Court upheld the lower court’s order denying the employer’s motion to use arbitration to settle the case.

This Court decision illustrates several important issues:

1. When implementing an Alternative Dispute Resolution system, make sure the policy clearly states binding arbitration as the final step. To do this there must be a formal agreement to arbitrate signed by the parties. This agreement should be separate from an employee handbook policy statement.

2. Although you may reference or explain the Alternative Dispute Resolution process that ends with binding arbitration in the handbook, do not use the handbook to set in place the necessary agreement. Chances are your handbook may also contain a contract waiver clause in its introduction statement that is typically titled About this Handbook or Purpose of this Handbook. Where present, this waiver clause makes clear that nothing in the handbook should be construed as a contract for employment or in the case at hand – arbitration.

3. Besides being an important communications tool, where questions of policy and employer intent are brought up in a lawsuit, Courts will reference handbook policies where necessary. So, make sure your policies clearly state what you want to do.


Source: Michael Southard v. Newcomb Oil Company LLC No. 20-5318. 8/4/2021. Sixth Circuit Court of Appeals.


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