“Oh, my back, my back, my neck and my back. Oh, I want 150,000 thousand—but we can settle out of court right now for twenty bucks.”—Ezal (Friday)
In reviewing employment agreements lately, we often see a paragraph requiring an employee to arbitrate employment disputes. Generally, the paragraph contains language like the following: “Any dispute, controversy, or claim arising out of or related in any way to Employee’s employment by Employer, or termination of employment, shall be submitted to and decided by final binding arbitration.” Arbitration is often viewed as a simpler, faster, and less expensive alternative to fighting an employment claim in court. Also, arbitration clauses or agreements have become more attractive since the U.S. Supreme Court’s 2018 decision in Epic Systems Corp. v. Lewis[1] that removed certain hurdles to requiring employees to waive class action claims in arbitration clauses or agreements. But is arbitration the best option in all instances?
As with many decisions in the employment law area, the answer is—It depends. There are pros and cons of using arbitration as a means of resolving disputes.
On the “pro” side, it is true that arbitration, because of its more informal nature, can be less costly for employers than a protracted lawsuit with all of its related discovery (e.g., depositions, written interrogatories and answers, etc.) and litigation costs. Additionally, arbitration proceedings usually move more quickly than litigation, often leading to resolution of issues in months rather than the possible years of protracted court battles. In an arbitration, an employer is dealing with a single, hopefully neutral decision-maker—the arbitrator—rather than a potentially fickle jury that could end up favoring a complaining employee for reasons unrelated to the merits of a particular dispute. Unless the parties agree otherwise, arbitration proceedings and results are normally private, thus avoiding possible negative publicity. Properly written arbitration clauses also can be used to keep the complainant to a single party rather than a class of allegedly wronged employees. And, arbitration offers closure to a matter since the decision of the arbitrator is usually final and not subject to appeal.
On the “con” side, there are issues that are the reverse of a number of the “pro” issues above. For example, maybe an arbitration will be more costly than a quickly dismissed lawsuit since the employer, as the deeper-pocketed party, usually is responsible for all arbitration costs and arbitrator fees. The finality of an arbitration proceeding also may work against an employer if the arbitrator reaches an unfavorable decision and the employer is precluded from appealing the decision. Although discovery burdens often will be less in arbitration than ordinary litigation, the lack of discovery may result in decisions being made based on the limited facts available at the time of the arbitration, whereas a litigated dispute may reveal facts that could allow rapid dismissal of unsubstantiated claims. And sometimes an arbitrator overseeing an arbitration proceeding may be looking, consciously or unconsciously, to “split” the dispute so that both parties, particularly the employee, come away with some resolution.
Aside from these pros and cons, there also is the issue of compatibility of mandatory arbitration of employment claims with the culture of a company.
Just ask Google, which recently abandoned required arbitration of internal employee disputes following several months of employee protests about such clauses (among other things).[2] Employees tend to dislike arbitration clauses, believing that such requirements always favor the employer, take away a sacred right to a jury, and reduce transparency. An employer considering using an arbitration clause or agreement should weigh employee reaction to required arbitration and the effect it may have on employee morale or the willingness of an individual to enter into an employment agreement.
If you do decide to take the arbitration path and create a standalone arbitration agreement or an arbitration clause, here are a few items to consider:
- Do not include arbitration clauses in employee handbooks. There is the potential that courts will not enforce such a clause if buried in other general handbook provisions. Doing so also may nullify any at-will employment relationship and arguably create a contract of employment.
- Ensure that the arbitration requirements are mutual and apply to both the employer and employee. Courts take a dim view of what they may perceive as clauses that are heavily weighted toward an employer.
- Exempt any claims from arbitration that by law cannot be arbitrated. These include unemployment benefits, workers’ compensation, and certain administrative agency complaints or claims.
- Identify the rules and procedures that will apply to the arbitration, such as the American Arbitration Association’s Employment Arbitration Rules and Mediation Procedures. Also, consider specifying that the Federal Arbitration Act will govern the arbitration to take advantage of federal court decisions that have favored arbitration as a means of resolving disputes.
Note that these items are not exhaustive, and you should consult with an employment attorney about the content of any arbitration agreement or clause you wish to prepare. Properly drafted, an arbitration clause or agreement may be appropriate for your business and allow you to resolve matters out of court.
[1] 138 S. Ct. 1612 (2018).
[2] See “Google Ends Forced Arbitration for All Employee Disputes” (Feb. 21, 2019), available at https://www.nytimes.com/2019/02/21/technology/google-forced-arbitration.html.