Third Circuit Invalidates Arbitration Clause In Employment Contract

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It is common for employers to include mandatory arbitration clauses in employment contracts offered to new employees. Sitting in the room with your new boss, it is difficult to resist signing the contract as presented. How can one reasonably “make waves” even before being hired? Of course employees feel they have no choice but to sign the contract as a take it or leave it.

This past October, the U.S. Court of Appeals for the Third Circuit decided a case that will revurberate for a long time in many types of cases. The district court had held that a an employment contract containing a mandatory arbitration clause was valid, and simply severed the predispute employment arbitration agreement. However, the Third Circuit held that the employer-friendly provisions were so strong as to invalidate the entire agreement.

In this case, an employee was presented with a standard employment contract, which contained a “grievance and arbitration procedure” stating that it constituted the “sole final, binding and exclusive remedy for any and all employment-related disputes.”

The requirements included: (1) filing a “detailed written grievance” with the employee’s manager within five days of receiving notice of a disputed action; (2) refiling that grievance with a managing director within two days of receiving a response from the manager; and (3) filing a written request for arbitration within five days of receiving the managing directors decision.

The court ultimately decided that the contract presented to the employee was incredibly one sided. Since the employee was given no room for negotiation by the company, the court ruled that “the contract was procedurally unconscionable.”

Bonny G. Rafel‘s commentary: Had the contract contained a “non binding” arbitration clause, I expect the court would not have invalidated the contract, but by forcing binding arbitration, the employee was signing away his constitutional right to a trial by jury.