arbitration agreements

The Pre-Injury Arbitration Agreement: The Texas Non-subscriber’s New Tool to Limit Liability for Workplace Injuries

For more information contact Allen Cooper, (512) 474-0007 ext. 208

Because a Texas non-subscriber employer does not carry workers’ compensation insurance, the personal injury lawsuit is often the only way an injured employee can receive compensation for a workplace injury. The Texas Legislature has repeatedly acted to protect the injured employee’s right to sue a non-subscriber employer whose negligence has contributed to a workplace injury whenever non-subscriber employers have tried to limit that right. The Texas legislature has stripped non-subscriber employers of many common-law defenses, prohibited the use of pre-injury liability waivers, and limited the use of post-injury liability waivers.[1] The Texas Arbitration Act limits the use of arbitration agreements in personal injury cases generally.[2] But a growing number of Texas employers are using pre-injury arbitration agreements to limit their liability for workplace injuries and to defeat the intent of these laws. This trend is of particular concern because preemption by federal law limits the ability of the Texas legislature to regulate pre-injury arbitration agreements.

The Growing Use of the Pre-Injury Arbitration Agreement

Texas is the only state that makes worker’s compensation insurance coverage optional for any employer, and currently more than 1.7 million Texas employees are not covered by workers’ compensation insurance.[3] Employers with workers’ compensation insurance are protected from personal injury suits for workplace injuries, but non-subscriber employers do not have this immunity. In fact non-subscribers are stripped by Texas law of a number of common-law defenses to negligence suits.[4] An injured employee’s right to bring a personal injury suit is important because it is often the only way the employee can receive compensation for an injury and it creates incentives for non-subscribers to focus on workplace safety, and to develop private workplace injury plans.[5]

In recent years non-subscribers have developed legal tools to limit their liability for workplace injuries. In each case, the Texas legislature has acted to restore a level playing field between injured employees and non-subscriber employers. Non-subscriber employers once used pre-injury liability waivers, under which an employee was asked to sign a contract waiving his future right to sue the employer for negligence in the event of a future workplace injury. The Texas legislature outlawed these pre-injury waivers by statute in 2001.[6]

Non-subscriber employers responded by using post-injury waivers, in which an injured employee was asked to sign a waiver releasing the employer from liability for the workplace injury. In some cases workers were asked to sign the waivers before being rushed to the emergency room, and as a condition of receiving emergency medical care at the employer’s expense. In 2005 the Texas Legislature regulated the use of post-injury waivers by requiring a ten-day waiting period and requiring that the employee see an independent non-emergency doctor for the waiver to be effective.[7]

The Texas Arbitration Act limits the use of pre-injury arbitration agreements in the personal injury context generally. For an arbitration agreement to be binding each party to the claim must, on the advice of counsel, agree in writing to arbitrate, and the agreement must be signed by each party and each party’s attorney.[8]

It appears that non-subscriber employers are moving to a new legal tool, the pre-injury arbitration agreement, to limit their liability. With the waiver, the employee typically completely surrenders a legal cause of action. With an arbitration agreement, by contrast, the employee surrenders his right to a jury trial. Because the arbitration agreement is often written in a manner that also surrenders some procedural and substantive rights, grants the employer the right to select the company providing the arbitrator, and requires the employee to pay half the cost of arbitration, the arbitration agreement in practice is just as effective as the liability waiver in protecting the non-subscriber employer from liability for workplace injuries and preventing the injured employee from taking his claim to court.

In fact, it is probably more effective than the currently available post-injury waiver because Texas courts have held arbitration agreements to be binding even if signed before the injury occurs.[9] In many instances, employees are asked to sign a broad arbitration agreement at the time of hiring, or at the introduction of a new personnel policy, before any dispute has arisen. The arbitration agreements are often very broad, encompassing workplace injury claims without naming them expressly, as required by the post-injury waiver law. Most employees do not expect to be injured and are likely to under-value the right that they are signing away, if they are aware that they are signing it away at all.

Even before the passage of the 2005 law regulating post-injury waivers, arbitration agreements were used by non-subscribers with twice the frequency as waivers (in 2004 12.2 percent of non-subscribers reported using arbitration agreements compared to 6 percent who reported using waivers.) Almost all of non-subscribers using arbitration agreements (94 percent) asked employees to sign them before any injury occurred.[10]

Non-subscriber employers do not publicize their arbitration agreements, but an arbitration agreement used by Robroy Industries, an electrical products manufacturer based in Gilmer, Texas, is illustrative. The agreement covers “all claims or controversies, past, present, or future,” with only a small subset of claims excluded. The selection of the arbitration organization is to be made by the “party who did not initiate the claim,” which in the case of a workplace injury suit would be the employer. The cost of the arbitrator is to be shared by the employee and the company. The right to a jury trial is expressly surrendered, and judicial review is limited to actions to require arbitration under the agreement, and to enforce awards made by the arbitrator. Employees were asked to sign the agreement before an injury had occurred.

The purpose of the legislation relating to pre-injury and post-injury waivers is to assure that injured workers have the opportunity to have their injuries evaluated by independent non-emergency medical personnel before surrendering their right to a jury trial. A pre-injury arbitration agreement defeats that purpose.

The Texas Legislature’s Ability to Regulate Arbitration Agreements is Limited

The Texas laws regulating waivers would appear to limit the use of arbitration agreements, but a recent Texas court decision held these laws to be ineffective against a pre-injury arbitration agreement on the basis that the Texas laws were preempted by the Federal Arbitration Act.[11] In Sosa vs.Parco Oilfield Services, decided in U.S. district court in September 2006, a pre-injury arbitration agreement was upheld against a challenge that it was invalidated by Texas Labor Code S. 406.033(e) which prohibits pre-injury waivers. The arbitration agreement was upheld on the basis that the Texas law was preempted by the Federal Arbitration Act under the supremacy clause of the U.S. Constitution.[12]

The Federal Arbitration Act will preempt any Texas law intended to regulate arbitration agreements if courts find that the arbitration agreement has a “substantial effect on interstate commerce.”[13] The scope of employers captured by this term has not been defined, but it is a large number of employers and would certainly include all companies with more than $500,000 in gross revenues, or approximately 7 employees.

The effectiveness of arbitration agreements in shielding employers from tort liability helps to explain the paradox of the recent finding that only small and medium size companies are responding to declining workers compensation premiums by returning to the workers compensation system, while large employers (with more than 500 employees) are leaving the system in growing numbers.[14] If a company can be shielded from tort liability for workplace injuries by asking employees to sign a simple pre-injury arbitration agreement, what incentive does it have to purchase workers’ compensation insurance?

Conclusion

Texas has a dual workers compensation system in which 63 percent of Texas employers choose to carry workers compensation and 37 percent of employers choose to be non-subscribers to the workers compensation system. Non-subscriber liability for workplace injuries is important to insure that injured employees of non-subscribers have effective remedies for workplace injuries, and to create an incentive for non-subscribers to rejoin an improving workers compensation system. The Texas legislature has acted to protect the right of injured employees to sue non-subscriber employers for personal injuries whenever non-subscribers have unfairly sought to limit that right. The pre-injury arbitration agreement is the latest legal tool to undermine those laws.

Because of federal preemption, the Texas legislature is limited in its ability to regulate arbitration agreements, but three possible avenues remain open. One way to eliminate the use of arbitration agreements in workplace injury cases would be to make workers’ compensation mandatory for all employers. A second is to draft the legislation in a manner that bases the prohibition on the state’s power to define the standard that makes a contract unenforceable because it is unconscionable.[15] A third option is to draft

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[1] Tex. Lab. Code Ann. 403.033

[2] Tex. Civ. Prac. & Rem. Code 171.002(a)(3), (c).

[3] “The Effects of the 2005 Legislative Reforms on the Affordability and Availability of Workers’ Compensation Insurance for Texas Employers: A Report to the 80^th Legislature,” Texas Department of Insurance, December 2006, p. 7.

[4] Tex. Lab. Code Ann. 403.033(a)

[5] While some non-subscribers have private workplace injury plans it is exposure to negligence liability which provides the incentive for non-subscribers to develop these plans.

[6] Tex. Lab. Code Ann. 403.033(e)

[7] Tex. Lab. Code Ann. 403.033(f).

[8] Tex. Civ. Prac. & Rem. Code 171.002(a)(3), (c).

[9] Beldon Roofing & Remodeling Co. v. Tanner, No. 04-97-00071-CV, 1997 Tex. App. LEXIS 2781, at 1-14 (Tex. App. May 28, 1997) (allowing a non-subscriber to enforce an arbitration clause contained in its private benefit system against a challenge that it was invalid under the Texas Arbitration Act) and Joe Sosa v. Parco Oilfield Services, LTD., ET AL, 2006 U.S. Dist. LEXIS 70312 (allowing a non-subscriber to enforce an arbitration clause against a challenge that it was invalid under Texas law as a pre-injury waiver.

[10] “Employer Participation in the Texas Workers’ Compensation System: 2004 Estimates,” Texas Department of Insurance, Workers’ Compensation Research Group, October 20, 2004.

[11] Sosa at 7.

[12] In RE: R&R Personnel Specialists of Tyler, 146 S.W.3d 699 (2004).

[13] In Re Turner Brothers Trucking Company, INC., 8 S.W.3d 370 (1999).

[14] Texas Department of Insurance, supra note 2 at 8.

[15] See Elizabeth Thornburg, Mandatory Arbitration: Contracting with Tortfeasors: Mandatory Arbitration Clauses and Personal Injury Claims, 67 Law & Contemp. Prob. 253, (2004), and Paul Carrington, 35 Harv. J. on Legis. 225, (1998.)