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Court Refuses to Enforce Employment Arbitration Agreement Due to Chilling Effect on Employment Law RIghts


While employment agreements that include arbitration agreements (agreements which force any dispute between the employer and the employee into arbitration rather than the courts) have been on the rise lately, employers have not always found that they can enforce these agreements. Often, whether the court will find the arbitration provision to be enforceable depends on whether the provision has a “chilling effect” on employees exercising their rights under the applicable employment law.

Courts had to consider this requirement when ruling on a recent dispute between an employee and his employer. The employee, Jose Hernandez, filed a lawsuit against his employer, Colonial Grocers, Inc., for allegedly violating the Fair Labor Standards Act and Florida employment law. Colonial’s employment manual contained an arbitration provision and so Colonial filed a motion to force the case into arbitration in accordance with that provision. The trial court granted Colonials’ motion and Hernandez appealed the decision and the case went to the Second District Court of Appeals.

The arbitration provision in question not only stated that any dispute between the parties needed to be settled through arbitration, but it also made provisions for which party was to be responsible for the costs of the arbitration. According to the provision, “Although the parties shall initially bear the cost of arbitration equally, the prevailing party … shall be entitled to reimbursement for its share of costs and reasonable attorneys’ fees, as well as the interest at the statutory rate.”

In determining the enforceability of this arbitration provision, the appellate court pointed out the important difference between the costs of bringing a lawsuit to court as opposed to bringing an action under this arbitration provision. According to the Fair Labor Standards Act, a plaintiff who is successful in court is entitled to reimbursement of all of their attorneys’ fees and costs of bringing the suit. However, there is no case in which the Act would provide for the defendant’s eligibility for reimbursement of attorneys’ fees and legal costs. Hernandez therefore argued that the arbitration provision contradicted the statute under which he was filing his complaint.

Because plaintiffs risk getting stuck paying for both their own costs of arbitration as well as the costs of Colonial, a plaintiff faces a potentially much higher cost for bringing a complaint under arbitration than they ever would in the courts. These higher costs might deter employees from pursuing their rights under the Fair Labor Standards Act. Due to the existence of this possibility, the court ruled that the arbitration provision had a “chilling effect” on employees who might otherwise bring claims under the Fair Labor Standards Act. The court therefore ruled that the arbitration agreement was unenforceable and remanded the case back to the district courts for further proceedings.

In its ruling on the case, the appellate court quoted from previous rulings which found that “[a]n arbitration agreement containing provisions that defeat a federal statute’s remedial purposes is not enforceable.”

Although employers are always looking for ways around employment law, any methods which directly contradict the applicable law are less likely to be upheld in court.

A copy of the Appellate Court’s decision can be viewed here.

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The Chicago Overtime Law Center is based in Chicago, and represents clients throughout the country who have not been paid for the overtime hours that they worked. If you believe that you are owed overtime wages, contact one of our Chicago class action attorneys by phone at (312) 869-4095 or through our online form.