Arbitration Agreements, Audits, and Records Retention

A restaurant is barred from enforcing an arbitration agreement it required applicants to sign, because there was no consideration for signing and the agreement was unfair.


A large steakhouse chain that required all job applicants to sign an arbitration agreement to even be considered for a job could not enforce the agreement for numerous reasons. Therefore, employees who had filed a case alleging violations of wage and hour laws did not have to arbitrate their claims, but could instead continue in court.

The court used ordinary contract law to explain the different reasons the arbitration agreement was unenforceable. First, the restaurant did not offer the applicants anything (like extra money) in exchange for the agreement to arbitrate. It just required them to sign it if they wanted to be considered for a job. Also, the restaurant did not give the individuals time to carefully read or think about the agreement, and in some cases, managers gave prospective employees the wrong information about the contract.

The court found that the individuals did not knowingly sign the agreements to arbitrate, and that many of them did not have the education, experience or background necessary to understand what they were signing. Finally, it was unfair for the restaurant to offer the agreement on a “take it or leave it” basis.

This case shows the types of issues an employer should consider if it wants to have its employees sign arbitration agreements. It is critical to give something to employees in return for their signing such an agreement, and also to give the employees time to understand the contract and ask questions.

Wage-and-hour audits are becoming common for many employers under the FLSA.

With the amendments to the regulations interpreting the Fair Labor Standards Act (FLSA) now almost nine months old, many employers and employees are beginning to understand how these new regulations actually affect the decision of whether an individual is exempt from the right to be paid overtime. Additionally, many employers who want to avoid the possibility of litigation, as threatened by the Department of Labor, have undertaken in-house audits of their workforce to make sure all workers are being paid in compliance with the law.

An audit involves categorizing job titles and classifications as exempt or nonexempt after an analysis of job duties, rates of pay and other factors. Some employers have discovered that they have not taken a careful look at their workforce classifications for many years, and that many employees whom the employer classified as exempt may be nonexempt. Armed with new data about their workers, and knowledgeable about the changes to the FLSA, employers have been able to reclassify employees correctly before being faced with a lawsuit.

It is important for both employers and employees to understand their rights and obligations under the FLSA, to make sure that employees are receiving all the money they are entitled to, and that employers are not unintentionally paying their workers too much or too little.

–Marc Jacobs, Labor and Employment attorney, Seyfarth Shaw LLP, with assistance from Melanie H. Berkowitz, Esq., Seyfarth Shaw LLP.

An effective records-retention policy is a must for any employer.

Having a good policy in place for records retention can help employers avoid liability, protect employees’ privacy and assist in responding to legitimate information requests. An easy rule for records management is that business records should be retained as long as they retain value for some business purpose and are legally required, but no longer than that.

Employment and labor matters are heavily regulated. Federal, state and sometimes local governmental agencies enforce a wide range of laws and regulations affecting wages and hours, equal employment, employee organizational activities, workplace health and safety and employee benefits. Many of these regulations also impose record-keeping and reporting requirements. Compliance with these many laws and regulations is often determined by human resources personnel.

In addition to employment law requirements, employers often create and keep large volumes of records without thinking about the need to do so. Frequently, these records are distributed to people who cannot practically use the information. The cost of such practices, including reading, filing and storing originals and multiple copies, is enormous. Further complications arise because records often outlast the recollections of their authors or recipients. Poorly worded documents require extensive research to clarify ambiguities, and the outcome of lawsuits sometimes hinges on uncertainties caused by innocent but unclear writings.

For all these reasons, all companies should create a clear records-retention policy that complies with applicable law.

–Marc Jacobs, Labor and Employment attorney, Seyfarth Shaw LLP, with assistance from Melanie H. Berkowitz, Esq., Seyfarth Shaw LLP.

Handle personnel information and records with care.

A good records-management program will establish guidelines for the creation and circulation of documents, encourage quick disposal of routine and marginally relevant records, and provide for careful organization and retention of truly important records in central, readily available files.

Personnel records are of particular concern, because they contain a wealth of personal and sensitive information about employees. As such, employers must be careful not to disclose, negligently or intentionally, any information that could violate the law or subject the employer to a lawsuit for invasion of privacy and/or defamation. Even when the contents of an employee’s personnel file may be directly relevant to litigation, discovery of the file may not be permitted in some jurisdictions absent a compelling need for the discovery that outweighs the employee’s right of privacy. Further, even if there is such a compelling need, the permissible scope of any disclosure from the personnel file will be only as broad as needed to satisfy the compelling need.

Improper internal use of personnel records should be minimized by allowing disclosure only to designated personnel having a “need to know.” Personnel who have a need to know would typically be only those individuals involved in decision making regarding promotions, wages or discipline.

When an employee requests access to his personnel file, this is often a warning that litigation will follow. While certain materials can be withheld, be aware that failure to produce documents the employee has a right to access under the law may result in stiff penalties. Therefore, it is good practice to ensure that the personnel file is complete and does not contain information that should not be in the file. Conversely, simply because materials are in the file does not necessarily render them subject to disclosure.

Personnel records are just one type of information businesses retain, but because of their highly personal nature, they deserve special treatment. Careful maintenance of personnel records is a must for any business.

–Marc Jacobs, Labor and Employment attorney, Seyfarth Shaw LLP, with assistance from Melanie H. Berkowitz, Esq., Seyfarth Shaw LLP.