Ever wonder if you can require an employee to split the costs of mandatory arbitration? The Sixth Circuit reinforced its 2003 en banc decision that allows for cost-splitting provisions in arbitration awards in the decision it issued Tuesday in the case of Mazera v. Varsity Ford Services, LLC et al. Of course, the court’s decision is not simply an affirmation that cost-splitting provisions are okay—rather, it is an affirmation that the validity of these provisions must be assessed on a case-by-case basis.

In this case, Omari Mazera was fired from his job as a car porter at Varsity Ford Services, LLC (“Varsity”). Mazera filed a lawsuit alleging that Varsity had discriminated against him on the basis of his race and disability; he also moved the district court to declare that the arbitration provision in Varsity’s employee handbook was unenforceable. 

The arbitration provision required employee complaints, including complaints of discrimination, to be resolved through a four-step process that ended with an arbitration proceeding. It also stated that, within ten days from the date of an unfavorable decision by the president of the dealership regarding an employee’s complaint, the employee “must deposit with the General Manager $500.00 or five (5) days pay, whichever is less. If you request a waiver of the deposit fee, you must state the reasons for your request and submit the request to the General Manager.” Mazera signed a document acknowledging receipt of the “Mandatory Complaint Procedure” and stating that he understood that compliance with the procedure “is a term and condition of employment.”

Both the district court and the Sixth Circuit outright rejected Mazera’s arguments that the arbitration agreement was unenforceable because he had not received consideration for his agreement and because the arbitration agreement was not a condition of his employment. After all, the courts noted that the arbitration agreement contained reciprocal obligations for both parties, which is sufficient consideration to create a valid contract. The courts also agreed that Mazera had specifically agreed that compliance with the arbitration procedure was a term and condition of his employment, thus his argument it was not lacked merit.

Where the Sixth Circuit disagreed with the district court’s decision, however, involved the district court’s conclusion that the cost-splitting provision was unenforceable. The Sixth Circuit reiterated that, in this circuit, the analysis of the enforceability of a cost-splitting provision must be completed on a case-by-case basis. The court must consider whether the potential costs of arbitration are so great that they would deter individuals from seeking to vindicate their federal statutory rights through arbitration. In other words, in each case, the court must consider whether the individual arguing that the cost-splitting provision is too expensive would also be considered too expensive by other people with the same job description, the same wages, and the same socioeconomic background. If the answer is yes—that the cost-splitting provision is so expensive that others in the same situation would choose to forgo pursuit of their claims—then the provision is unenforceable.

For example, in this case, the provision required a deposit of $500 or five (5) days pay, whichever is less. For an employee like Mazera, who earned approximately $20,000.00 per year, both the Sixth Circuit and the district court agreed that some potential plaintiffs may manage to come up with $500 and be determined to pursue their claims regardless of the costs, a substantial number of other would find the cost prohibitively expensive. The result would be that many potential plaintiffs who would otherwise pursue their federal statutory rights in court through a contingency-fee arrangement with an attorney, who would likely pay the $350 filing fee, may choose not to pursue those same rights through Varsity’s arbitration procedure because they alone would be responsible for the $500 arbitration deposit. The Sixth Circuit also emphasized that the time line for payment—a mere 10 days—may present an additional hardship to employees who are interested in pursing their claims.

But—and here’s where the Sixth Circuit disagreed with the district court—Varsity’s arbitration procedure allows for employees like Mazera to request a waiver of the deposit. While the district court questioned whether Varsity would genuinely consider and grant a waiver, the Sixth Circuit found that the opportunity for waiver saved the arbitration provision. According to the Sixth Circuit, the fact that arbitration is often significantly less expensive than litigation would suggest that an employer like Varsity would be willing to waive the cost-splitting requirement for employees who are unable to pay the required deposit. Moreover, if Varsity were to waive or sufficiently reduce the deposit amount for those employees who are likely to be deterred from pursuing their rights because they are unable to pay it, the provision is enforceable because it should not deter employees from pursuing their federal statutory rights. 

The net result for employers? Cost-splitting arbitration provisions are acceptable and enforceable so long as they allow all employees a true opportunity to pursue their rights. Employers may also want to consider including a waiver provision, such as the one included in Varsity’s arbitration procedure, that would protect the employer from arguments that the cost-splitting provision prohibited employees from pursuing their rights. Lastly, a waiver provision will only provide protection if employers fairly administer the granting or denial of waivers. So, if you choose to include such a provision, be sure that management is aware of your generous approach to the granting of waivers—only then will you be able to count on the cost-saving benefits that arbitration offers.