Because arbitration usually is cheaper and faster than litigation, employers often include arbitration agreements in their employment contracts. However, courts do not always enforce arbitration agreements. Although federal law favors arbitration, state and federal courts may find an arbitration agreement unenforceable for several reasons. One such reason is when the arbitration agreement contains a provision that contrary a federal statutory remedy.
Generally, a “fee-splitting” provision is a contractual provision requiring that the parties to an arbitration agreement share (or “split”) the costs of arbitration. Moreover, a “fee-shifting” provision is a contractual provision that requires the losing party in an arbitration proceeding to pay the prevailing party’s fees and costs associated with the arbitration, i.e., the costs of arbitration “shifts” to the losing party. “Fee-splitting” and “fee-shifting” provisions would normally not render an arbitration agreement unenforceable. However, the analysis changes when federal statutory rights are subject to arbitration. The rule is as follows: an arbitration agreement is unenforceable if the cost of arbitration effectively precludes the employee from vindicating his federal statutory rights. One such federal statutory right is the right to payment of minimum and overtime wages under the Fair Labor Standards Act (FLSA).
In Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79 (2000), the U.S. Supreme Court held that the “risk” that a party will be saddled with prohibitive arbitration costs is too speculative to render an arbitration agreement unenforceable. Following Green Tree, several federal court have upheld the validity of arbitration agreement containing fee-splitting provision. For example, in Maldonado v. Mattress Firm, Inc., 2013 U.S. Dist. LEXIS 58742 (M.D. Fla. Apr. 24, 2013), an employee argued that the arbitration agreement’s fee-splitting provision rendered the agreement unenforceable against his FLSA claim. The federal court held that in order to prevail on his argument, the employee was required to present evidence of (1) the amount of costs he is likely to incur and (2) his inability to pay those costs. A showing of the “possibility” of incurring prohibitive costs is not sufficient. The federal court held that the arbitration agreement was enforceable despite the employee’s FLSA claim.