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Arbitration Clauses and the FLSA, Part II (Prevailing Party Fee Clauses)

In our last post, we discussed how an employee might be limited to pursuing only her individual FLSA claim if she signed an arbitration agreement containing a “collective action waiver.”  That post correctly suggests that an arbitration agreement may be a powerful tool available to an employer.  But — having said all that — there are limits on what an employer can accomplish through an arbitration agreement with employees.

In Hernandez v. Colonial Grocers, Inc., the plaintiff filed a lawsuit alleging FLSA violations against his employer, Colonial Grocers, Inc.  The employer moved to compel arbitration, based on a clause in the employment manual signed by plaintiff.  Under that clause, “[a]ny controversy or claim arising out of or relating to the employment relationship between the employer (Company) and employee (you) . . . shall be settled by arbitration in accordance with the Arbitration Rules of the American Arbitration Association.”  That clause also authorized an award of attorneys’ fees to the prevailing party in arbitration.

Although  the  parties  shall  initially bear the cost of arbitration equally, the prevailing party, if any as determined by the arbitrator at the request of the parties which is hereby deemed made, shall  be  entitled  to  reimbursement for its share of costs and reasonable attorneys’ fees, as well as interest at the statutory rate.

The trial court granted Colonial Grocers’ motion to compel arbitration, and Plaintiff appealed.

The Second District Court of Appeal reversed.  The Court noted that the FLSA entitles a prevailing plaintiff to an award of reasonable attorneys’ fees, “but it does not allow for prevailing party fees for the defendant.”  The Court concluded that a clause authorizing a fee award to a prevailing defendant undermined the purposes of the FLSA, and couldn’t be enforced.

This is a sufficient enough chilling effect to defeat the remedial purpose of the federal act. The attorney’s fees provision of the Fair Labor Standards Act is intended to encourage  employees  to  seek  redress  when  they  believe they have been wronged by an employer. The arbitration agreement, however, does just the opposite—it discourages the employee from pursuing a claim. As such, under Flyer Printing, it is unenforceable. See 805 So. 2d at 833 (“An arbitration  agreement  containing  provisions  that  defeat  a federal statute’s remedial purpose is … not enforceable.”).

The Colonial Grocers case is an important reminder that the power of an arbitration agreement has its limits.  It’s also an important reminder that careful planning, and careful drafting, matters in preparing employee contracts and manuals.  For all the lawyer jokes,1Q. How do you stop a lawyer from drowning? A. Shoot him before he hits the water. it’s crucially important for employers to have solid legal guidance in establishing and maintaining good business practices.

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