As a condition of employment, Waffle House Inc., based in Norcross, Ga., required employees to sign an agreement mandating that employment disputes be settled through binding arbitration. Eric Baker agreed to this in his application for a job at a Waffle House restaurant. In August 1994, 16 days after starting work as a grill operator, he suffered a seizure. After being fired a short time later, he filed a discrimination claim with the EEOC, alleging violations of the ADA.

After investigating the claim and failing to conciliate, the EEOC filed suit against Waffle House. Mr. Baker was not a party to that suit, nor did he seek to arbitrate his dispute or to enter into settlement negotiations with Waffle House.

The EEOC complaint sought an injunction to “eradicate the effects of past and present unlawful employment practices” by Waffle House. It also asked for back pay, reinstatement and damages for Mr. Baker.

In allowing the lawsuit to proceed, the court found that both Title VII of the Civil Rights Act of 1964 and the ADA “unambiguously” authorize the EEOC to obtain the type of relief it was seeking if it can prove its case against an employer.

(Title VII prohibits employment discrimination based on race, national origin, color or gender. While the decision repeatedly refers to Title VII statutory and case law, technically, the court did not and could not extend its holding to Title VII cases, since Waffle House was decided in the context of only the ADA.)

The court also found that the ADA specifically grants the EEOC exclusive authority over the choice of forum and the demand for relief once an employee has filed a charge with the agency.

Joan M. Gilbride, an employment litigation specialist and member of the New York law firm Kaufman, Borgeest & Ryan, called the decision a “blow” for employers. In her view, the Waffle House decision means that “the EEOC can control the destiny of a matter” once the agency is made a party to it. The EEOC becomes a party only when an employee files a discrimination charge with the agency.

But Ms. Gilbride quickly added that she is advising her clients not to be too concerned about Waffle House. First, she said, the EEOC can pursue litigation as a party plaintiff only after finding that probable cause exists for the filing of a lawsuit. Second, even when the EEOC finds probable cause, statistics show that the agency gets involves in litigation “in a very small percentage of cases,” she said.

Mr. Dolowich concurred on this point. He noted that both the Waffle House majority opinion and the EEOC Web site indicate that the agency found probable cause in about 10 percent of the nearly 80,000 discrimination charges filed in 2000. But the EEOC itself filed only 291 lawsuits and intervened in 111 other lawsuits. In contrast, roughly 21,000 employment suits were filed in 2000 by private-party plaintiffs.

As noted in Waffle House, this means that the EEOC files less than 2 percent of all employment discrimination claims in federal court.

Nevertheless, Mr. Dolowich believes the Waffle House case has several implications for EPL insurers and employers. With respect to large EPL risks, he said that the EEOC will probably become more involved in the larger cases due to “prodding” by plaintiffs' attorneys.

Mr. Dolowich also believes that EPL insurance policies will have higher deductibles. Additionally, some insurers may start offering split retentions, he said. Under this scenario, there would be one deductible for class EEOC and multi-party cases, and another deductible for individual cases, he explained.

Mr. Dolowich also thinks that more charges will be filed “in the hopes the EEOC will pick up the case.” But he added that the EEOC will probably continue to intervene only in the most egregious cases or where it can “effectively show a pattern or practice of systematic discrimination.”

Mr. Dolowich said that Kemper and other EPL insurers–along with the EEOC–will be paying “extremely close attention” to whether employers have the appropriate anti-discrimination compliance programs in place. Such programs help establish an affirmative defense in the event that an employee files charges against the employer, he noted.

Both Ms. Gilbride and Mr. Dolowich admitted that in terms of drafting arbitration clauses, there is little an employer can do to circumvent Waffle House.

“It's already law that you can't force people to give up their right to proceed on an EEOC claim,” Ms. Gilbride stated. Therefore, in advance of a dispute, “there's nothing you can do to prevent the filing of an EEOC claim–not that I've come up with yet, anyway,” she said.

However, she said that after a dispute has erupted, an employer who, for example, seeks to terminate an employee may be able to offer a severance package or some other incentive in exchange for a release of the EEOC claim.

Mr. Dolowich added that the EEOC is not a party to such arbitration agreements, and enjoys broad statutory powers that cannot be changed or usurped by redrafting the arbitration agreements. At any rate, he said, Kemper would not want its insureds to try such a redraft.

Based on how the U.S. Supreme Court has acted in the past in similar situations, both Mr. Dolowich and Ms. Gilbride believe that Waffle House could be extended to Title VII employment discrimination cases. But overall, Ms. Gilbride said it is “absolutely” valuable for firms to continue including arbitration clauses in employment contracts.

Similarly, Mr. Dolowich believes that because the EEOC involves itself in so few cases, arbitration will still be “extremely valuable in most circumstances.” In fact, he predicted that most agreements will go unchallenged.

Therefore, he expects employers to continue to use arbitration clauses extensively, because arbitration is generally “the most effective forum for resolving employment disputes quickly and cost effectively.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, May 20, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.