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A severance agreement between a railroad company and its employee does not fall within the railroad exception to the Federal Arbitration Act (FAA) when the agreement does not change the terms and conditions of the employment relationship, according to a federal district court in Iowa.
In Awe v. I & M Rail Link, L.L.C., No. C04-3011-PAZ, 2007 WL 2572405 (N.D. Iowa Sept. 04, 2007), Awe was employed by railroad I & M, which entered into an "Employee Incentive and Severance Agreement" with Awe and other employees. The agreement promised employees bonuses for remaining with I & M and promised severance pay to employees if I & M was sold. The agreement did stipulate, however, that a change in ownership of I & M would not constitute termination of employment and not entitle employees to severance pay should the employees be offered the substantially same employment with the new owner.
I & M was later sold, and Awe was offered and accepted a position with the new owner. Later, Awe filed a complaint alleging that the new position was not substantially similar and demanding that he receive severance pay under the terms of the agreement.
I & M sought to compel arbitration of the claim, noting that the agreement contained a provision requiring arbitration of any dispute under the agreement. Awe opposed arbitration, claiming that the agreement was a railroad employment contract, and, therefore, not within the scope of the FAA. The Court stayed the matter, and compelled arbitration of the issue.
The arbitrator determined that the arbitration provision was neither unconscionable nor otherwise invalid. Awe then filed a motion with the court to vacate the arbitrator's order on unconscionability, claiming again that the arbitrator had no subject matter jurisdiction because the agreement did not fall within the scope of the FAA.
While the Court acknowledged that Awe was a railroad employee, the Court determined that the agreement was not a railroad employment contract that would fall outside the scope of the FAA. Instead, the Court held that the agreement did not relate to the terms and conditions of employment and did not change the nature and extent of the employment relationship, but only addressed the rights and obligations of employees should they continue the previously defined employment relationship with I & M or any successor entity. This, according to the court, did not constitute an employment contract between the parties, and did not trigger any exception to the policy favoring arbitration under the FAA.
The Court did caution I & M that the "at-will" nature of the employment relationship did not, by itself, compel enforcement of the arbitration provision under the FAA. The Court explained that "employment at will is not a state of nature, but a continuing contractual relation," implying that if the agreement here would have altered the terms and conditions of the employment relationship, it could have fallen within the FAA exception for railroad employment contracts, despite the "at-will" nature of employment.
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