Helpful or Overrated?
By Richard Deleissegues
The answer to that question likely turns on your own unique situation as an employer. If you’re a large employer with hundreds of employees in similar roles (think restaurant chain, etc.) then there is a good case to be made for including an arbitration agreement in your application for employment. As discussed below, an arbitration agreement may not be the wisest choice for an employer with a smaller number of employees.
A surprising trend that has emerged (based on data collected from the few states that allow a jury to revisit and in some instances overturn an arbitrator’s decision) has shown that in many cases, the eventual outcome is actually better for the defendant when a judge decides legal questions and a jury awards (or doesn't award) damages in an employment case versus having an arbitrator decide. For one thing, while it can be quite rare for some courts to grant summary judgments, it’s even less common for an arbitrator to do so. Then, when it comes to the question of damages, the jury is likely to award zero damages in cases in which it feels the defendant has no liability, whereas the arbitrator is more likely to simply award less. This distinction becomes all the more important in cases in which attorney fees attach to the prevailing party, since even a modest award could trigger a disproportionate attorney fee award going to your opponent's lawyer.
Add to the mix the fact that many arbitrators' decisions are not subject to appeal, and arbitration can become downright dangerous.
WHEN ARBITRATION AGREEMENTS ARE PRECIOUS
For large employers who face the threat of class action lawsuits in the employment arena (e.g. wage and hour, misclassification, etc.) an artfully drafted arbitration agreement can be very valuable. While a poorly written agreement could send the company to a class-wide arbitration, a good agreement makes it difficult, if not impossible, for plaintiffs’ lawyers to find class members who are able to bring their case to court as a representative for a much larger class. If each potential class member is forced to proceed in arbitration rather than file a case in court, then no class action can develop. Even if some employees can be found without a binding arbitration agreement in place, the class can be much smaller and more difficult for plaintiffs to ascertain if most of the potential members have waived their right to bring a grievance to court in favor of arbitration.
WHEN ARBITRATION AGREEMENTS MIGHT NOT MAKE SENSE
Small employers should look very closely before adopting a policy across the board of having employees enter into arbitration agreements. If the employer is not a likely target for class action litigation, then the arbitration process is likely to apply only to one or two aggrieved employees at a time. Sometimes arbitration is touted as a faster and cheaper alternative to litigation, but in reality, it can be just as expensive. Most, if not all, of the same discovery takes place in an arbitration setting, and that is where litigation costs typically start to add up.
Furthermore, while arbitration can often lead to a faster resolution, this advantage flows both ways. Often an experienced plaintiffs’ attorney will relish the arbitration setting more than the defendant, since the timeframes are compressed and a potential payout can be faster.
Although most arbitrators exhibit high levels of integrity, since they are generally paid on an hourly basis, they don’t have incentive to pare down the scope of the case early on like a court might. Rather, they can decide to hear all the issues at arbitration, and decide then whether or not each theory has merit. Arbitrators can also be more likely to “split the baby” and award something (even if it’s not everything the plaintiff is seeking) rather than to zero-out a plaintiff with a shaky case. As discussed above, even a nominal award can sometimes trigger an outsized attorney fee award.
Lastly, in many cases, an arbitrator’s award is not subject to the kind of appellate review available in the case of a court decision. Companies must be aware that they are putting a lot of trust into the hands of the arbitrator and that they must resign themselves to live with the results.
REVIEW YOUR OPTIONS BEFORE MAKING A DECISION
Be sure to consult with an experienced labor and employment attorney before deciding whether to incorporate a blanket arbitration agreement to your employment process. If you decide that it makes sense for your situation, he or she can help you draft the agreement so that it meets your needs while providing you the most protection from class action suits. An experienced attorney can also help ensure that your agreement will stand up to legal challenges so that it remains effective and enforceable when the time comes when you’re counting on it.
ABOUT THE AUTHOR
Richard Deleissegues is an attorney with more than 20 years experience in dealing with labor and employment legal matters. He has experience drafting arbitration agreements and compelling plaintiffs to arbitrate rather than litigating in court. He has also used the existence of arbitration agreements to defeat plaintiff's attempts to establish class-side employment litigation.