Contracts 101: Arbitration Clauses

Would you ever sign a contract that waived your right to a jury trial if you ever suffered some kind of injury or wrongdoing at the hands of a business owner? If you have a credit card, a mortgage, a car, or a cell phone plan, the chances are that you already have signed one and didn’t even realize it.

An arbitration clause requires the parties involved to resolve a dispute through an arbitration process. Arbitration is an out-of-court proceeding in which a neutral third party called an “arbitrator” hears evidence and makes a ruling. Arbitration is the most commonly used method of alternative dispute resolution, and you’ll find an arbitration clause in the fine print of all kinds of contracts these days, including salon employment contracts. Arbitration can be non-binding as well (meaning that you can appeal it and challenge it in court) but this has recently become the exception rather than the rule. The majority of arbitration contract clauses are binding, which means they typically cannot be appealed at all.

Many companies use arbitration clauses to keep their employees or the people that enjoy their services from bringing them to court. The objectivity of the arbitrator is questionable at best in many cases. Many national arbitration groups actively market their services to companies, casting serious doubts on their objectivity. In our case (as salon employees), we don’t particularly have to worry about this bias when employed by a private or small-scale employer. However, when working for a much larger corporate chain, the objectivity of an arbitrator may be a concern.

So what do these clauses look like? Here is an example of a simple arbitration clause from
Arbitration. All claims and disputes arising under or relating to this Agreement are to be settled by binding arbitration in the state of [insert state in which parties agree to arbitrate] or another location mutually agreeable to the parties. An award of arbitration may be confirmed in a court of competent jurisdiction.

Here is a more wordy example:
Arbitration. All claims and disputes arising under or relating to this Agreement are to be settled by binding arbitration in the state of [insert state in which parties agree to arbitrate] or another location mutually agreeable to the parties. The arbitration shall be conducted on a confidential basis pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Any decision or award as a result of any such arbitration proceeding shall be in writing and shall provide an explanation for all conclusions of law and fact and shall include the assessment of costs, expenses, and reasonable attorneys’ fees. Any such arbitration shall be conducted by an arbitrator experienced in [insert industry or legal experience required for arbitrator] and shall include a written record of the arbitration hearing. The parties reserve the right to object to any individual who shall be employed by or affiliated with a competing organization or entity. An award of arbitration may be confirmed in a court of competent jurisdiction.

The important thing to remember is that these clauses have the potential to completely eliminate your constitutional right to a trail. Do not sign them.

Arbitration clauses only benefit companies. They are not designed to benefit workers or consumers at all.

A friend of mine and I were speaking about binding arbitration laws when she checked her cell phone contract and realized there was one in the fine print. She said, “Well, it’s no big deal. It’s just my cell phone. I’ll just cancel it if something goes wrong and take the loss. What could happen with a cell phone, right?”

Lots of things could happen. They’re incredibly unlikely to happen, but your phone model could emit dangerous radiation, giving you a rare ear canal cancer. Maybe it will spontaneously combust and blow off your arm? Nobody knows what could happen, which is why these companies use binding arbitration clauses to begin with. What we do know (and this is because it’s sitting in front of us in black and white on the contract) is that if anything does happen, you will likely be required to comply with the decision an arbitrator makes in a private agreement. The decision you get may not be fair or rational, and there may not be anything you could do to appeal it (unless you can prove the arbitrator was biased which is insanely difficult).

Companies often defend these arbitration clauses saying that they keep the civil courts from getting “clogged” and that they “save money.” At one point, it was slightly cheaper to arbitrate than litigate, but that’s no longer the case. The actual core reasons that companies prefer arbitration to litigation are:

  • The arbitrator is often biased in favor of the company (since they tend to deal with the same companies over and over again and will only be dealing with you once), whereas juries often side with consumers instead of big businesses (so in a way, juries are biased against big companies).
  • Arbitration keeps the company from having to deal with the PR fallout of a scandalous lawsuit.
  • Arbitration clauses almost always prohibit class action. This means that if you and ten thousand other people are shafted by Bank of America, you cannot band together as a united front against them. Individuals often do not have the resources or time to recognize or prove the existence of fraudulent practices. Companies know this. They don’t want you to form a mob because mobs have the ability to bring them to task.
  • Arbitration prohibits public records. This means that (unlike court proceedings and court records), arbitration clauses require that the proceedings be kept confidential.

In 2002, the Supreme Court agreed with the Equal Employment Opportunity Commission’s contention that employment arbitration clauses could not prohibit the EEOC from filing an action itself against an employer for civil rights violations. Since the EEOC had not signed an arbitration agreement with any employer, the Court decided it was free to pursue claims against employers on behalf of an employee who had. However, you should not rely on the EEOC to defend your interests when preventative alternatives exist.

Take responsibility for your decisions and do not sign these agreements to begin with.

Okay, so now you understand what “arbitration” is and why it’s bad to sign an agreement that contains an arbitration clause as a consumer, but let’s get into specific examples related to our industry. (If you really want to learn more about how incredibly ridiculous and terrible mandatory arbitration clauses are, read this article on Public Citizen. What you discover will shock you.)

It is never a good idea to put any judgement that could potentially affect your long-term welfare into the hands of a single arbitrator without the possibility of appeal.

If you are presented with this clause in an employment contract, refuse it. Ask that it be amended to a mediation clause which requires both parties to attempt to come to a private resolution in mediation before filing suit in court. This method has the benefits of arbitration (less hostile than court, generally far more affordable, and almost always much faster) and none of the drawbacks (high expense, potentially biased neutral party, no right to appeal).

The goal of mediation is to reach a mutually acceptable arrangement to avoid litigation.

It is always better to come to an arrangement on your own terms than to accept what a judge or litigator hands you (unless the deal the opposing council is offering is absolute crap, in that case always go with the judge).

In mediation, you and your attorney make a deal with the company and their legal team that you both agree on. If you don’t agree, you litigate.

Nobody decides for you in mediation.

You retain that control unless you determine that there is no way you and the company will come to a satisfactory arrangement. If you think you could get a better deal in court, then you still have the right to go for it.


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2 Responses

  1. Do you have access to a properly scripted rental contract for a commercial lease between a self-employed service provider and the salon she would work in?

    1. No, and I highly (like ALLCAPS, italicized, bold text HIGHLY) recommend against ever using a template contract for anything, let alone something as critical as your business. Your operations will hinge on the effectiveness of this document. It is more than well worth the money to have an attorney who is familiar with your individual salon and your local area write the agreement for you.

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