Labor and employment litigation is like a black hole for many employers–it sucks valuable time and money from a company, providing little benefit in return. That’s why St. Louis-based Anheuser-Busch wanted to find alternative means of resolving employment disputes.

“We recognized that the threat of litigation hindered the resolution of employment disputes, and actual litigation was neither an efficient nor effective way to resolve issues between employees and their managers or between co-workers,” says Mark Bobak, group vice president and chief legal officer of Anheuser-Busch.

So in 2000 it sent out notices to all of its employees informing them of its new alternative dispute resolution program. Joann Melena, who worked at the company’s Mt. Vernon, Ill, distribution center, was one of those employees.

In 2002 Melena suffered a work-related injury and began collecting worker’s compensation. A year later, Anheuser-Busch terminated her, and in response she filed suit. The company asked the court to compel arbitration under the 2000 agreement.

Several appeals later, the Supreme Court of Illinois held that Melena was compelled to arbitrate her claims. The decision is good news for employers across the state, which now have more certainty that courts will enforce their arbitration agreements with employees.

“Employers can worry less because this ‘knowing and voluntary’ heightened standard is now pulled off the table, at least in Illinois,” says Jennifer Schilling, an associate in DLA Piper Rudnick Gray Cary’s labor and employment group.

Arbitration Nation

Anheuser-Busch isn’t the only company jumping on the arbitration bandwagon. According to the American Arbitration Association, an estimated 5 million individuals are currently covered by arbitration agreements, not including union employees.

“Companies have basically found a better alternative to litigation,” says Ann Elizabeth Reesman, general counsel of the Equal Employment Advisory Counsel, an association of employers that filed an amicus brief on behalf of Anheuser-Busch in Melena.

“Quite a few companies, particularly the larger companies, have implemented arbitration programs.”

However, despite the benefits of arbitration as an alternative to litigation, there have been some lingering ambiguities about whether courts would enforce arbitration agreements in the same way they would any contract or whether they would hold them to a higher standard–only enforcing them when the employee entered into the agreement “knowingly and voluntarily.”

According to most courts’ interpretations of the 1925 Federal Arbitration Act (FAA), arbitration agreements are subject to review under ordinary contract principles.

But there is still some disagreement among jurisdictions as to what level of scrutiny courts should use. In fact, the 1st, 7th and 9th Circuits have not developed clear jurisprudence on this issue.

“The Supreme Court said in 1974 that any sort of relinquishment of one’s rights must be a knowing and voluntary waiver,” Schilling says. “A whole other line of cases said it’s not a relinquishment of one’s rights. It’s just a forum choice.”

In Melena, the Illinois appellate court found Anheuser-Bush’s arbitration agreement unenforceable because it was essentially a condition of continued employment in which employees had no say. The Illinois Supreme Court reversed, thereby establishing the lower level of scrutiny as the statewide standard.

As the knowing and voluntary standard falls out of judicial favor, companies are finding that courts are increasingly upholding the enforceability of their arbitration agreements.

“Before the 1980s, courts tended to be rather suspicious of arbitration,” Reesman says. “In the mid 1980s, the Supreme Court started changing its mind and became more open minded that arbitration was in fact fair.”

Ensure Enforceability

Even if a company resides in a jurisdiction that views arbitration agreements as contracts, a court can find such an agreement unenforceable if it doesn’t meet certain requirements. For example, both parties should have equal say in who arbitrates a dispute.

“If a company wants to have an arbitration agreement, it’s going to be enforceable as long as the arbitration agreement is fair,” says Tracy O’Flaherty, a partner at Winston & Strawn. “There must be a neutral arbitrator provision such that it is not just someone the employer picks.”

An enforceable arbitration agreement also must not place an unjust burden on the employee. This includes ensuring that the company foots the majority of the bill for the arbitration proceeding.

“You can have the employee pay a nominal filing fee, which can help show that they are invested and it’s not strictly a company controlled program, but the employer should pay the majority of the costs,” Reesman says.

In addition, the manner in which the agreement is presented to employees will impact its enforceability. Often when introducing such programs, companies will make the mistake of adding the notice to the employee handbook. According to Schilling, this too could compromise the enforceability of the agreement.

“Employee handbooks likely have disclaimers saying, ‘This handbook is not a contract and can be modified or changed at any time,’” she says. “Companies need to make sure that this document on its face is a contract and that both parties are bound to it.”

And while arbitration may be a useful alternative for many companies, employers must factor in their company cultures to ensure the success of such programs.

“You really have to take a good look at your employee base and see what kind of people you have and where they are situated,” says William Davis, deputy GC of Brunswick Corp. in Lake Forest, Ill. “You need to have a lot of internal discussion with HR and senior management before coming to a conclusion.”