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Arbitrating Employment Claims: Pros and Cons

For any employer that has endured expensive, time-consuming, contentious employment litigation, arbitration must seem a welcome alternative and perhaps even a panacea. As explained below, the reality is much more complicated than this.

At first blush, arbitration has much to recommend it. It can be less expensive and burdensome than litigation. The parties can select an arbitrator who has expertise in the subject matter of the dispute. There is a level of confidentiality not found in litigation-pleadings are not part of the public record, no news articles trumpet the allegations. Decisions are typically final and binding, thus avoiding endless appeals and bringing closure to the dispute. The parties have more control over the dispute resolution process, because, rather than be at the mercy of a court's schedule, they can arbitrate where and when they choose. Arbitrators are less likely than juries to award runaway verdicts. In addition, arbitration provides more room for creativity than does litigation, because, within certain bounds, the parties can shape the arbitration to meet their specific needs. Also, unlike a jury, an arbitrator knows that even a small award for the plaintiff can trigger a significant attorney’s fees payment to plaintiff’s counsel. 

Yet, for all its virtues, arbitration has certain shortcomings as well. Indeed, many employers who once openly embraced arbitration have moved back to litigation.  In their experience, arbitration (perhaps because it still involves lawyers) is not as expeditious or inexpensive as is sometimes claimed. Arbitration requires that both sides (and their counsel) cooperate and act in good faith and this is hardly guaranteed to occur. Otherwise, the process can run amok just as it can in litigation. Further, while limiting the scope of discovery reduces litigation costs, it can also preclude obtaining critical evidence, which, in turn, can make settlement more difficult.

Whereas in litigation a plaintiff’s claims can be narrowed at the pretrial stage via motions to dismiss and for summary judgment, in arbitration a plaintiff often presents all of his claims at the hearing itself. Although the finality that arbitration offers is fine in the abstract, the employer risks being stuck with an incorrect decision with no avenue for appeal. And, arbitrators are notorious for "splitting the baby," which can be frustrating where a claim lacks merit. Arbitrators also tend to be looser with evidentiary issues, allowing hearsay, stray remarks and the like that courts would exclude. Also, arbitrators are paid by the hour, which can add significant expense to the process. Employees may perceive arbitration as less intimidating than litigation, and some believe this increases the likelihood they will assert claims against the employer. Finally, even employees who do not bring claims may generally resent the notion that their employer can require them to arbitrate claims as a condition of employment. Another significant downside to arbitration is that, ironically, while the whole point is to avoid litigation, the employer may end up having to litigate to enforce the arbitration agreement in the first place. Then, if it prevails, the employer may have to litigate to enforce the award.

For the most part, courts, pointing to the "liberal federal policy favoring arbitration" set forth by the United States Supreme Court in Moses H. Cone Memorial Hosp, v: Mercury Const, Corp., 460 U.S. 1, 24 (1983), have upheld arbitration of employment disputes so long as the arbitration agreement provisions are relatively even-handed. To withstand judicial scrutiny, an arbitration agreement generally must allow the employee to obtain the same basic kinds of substantive relief available in litigation, including, for example, attorney's fees and punitive damages, and must also contain appropriate procedural safeguards to ensure the process is fair and impartial. In this regard, one issue that has sparked litigation is who should pay the arbitration costs, and, in particular, the arbitrator’s hourly fees. Many employers do not want to pay the entire fee for fear this will simply encourage more claims. For their part, employees do not want to pay anything at all, because it is the employer who mandated arbitration and no such expense would be incurred with a judge. While courts review this issue based on the specific situation presented, they tend to impose most and sometimes all of the cost on employers, especially where the costs are such that they would deter an employee from seeking to enforce his or her statutory rights. 

There are myriad other such issues. For example, can the employer obtain attorney’s fees if it prevails? Can the statute limitations be shortened? Does the statute of limitations apply at all where there is an arbitration agreement? To what extent can the scope of discovery be limited? What if one claim is subject to arbitration but another is not? What if the employee asserts a claim against the employer and against a non-signatory to the agreement? Under what circumstances does an employer waive its right to arbitrate? Can arbitration awards be kept secret or must they be made public? What if a party contends the arbitrator was biased? What if the employee files a charge with a federal or state agency? What if employees seek to assert a collective claim against an employer? While some of these issues have been resolved over the years via the courts’ guidance, other issues remain in flux and/or subject to the particulars of a given situation. 

Ultimately, where an employer decides to mandate arbitration of employment claims, if the arbitration provision is clearly worded, procedurally fair and reasonable, and does not overreach this will greatly reduce the chances an employer’s arbitration efforts will instead result in litigation.

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