Should You Implement an Arbitration Policy? By Trevor W. Howell THowell@gsrm.com

Employment-related lawsuits are skyrocketing. They are also costly to both your bottom line and your company’s reputation.

If an employer is unsuccessful in the defense of an employment related lawsuit, either in state or federal court, not only is there a judgment to pay, but there may also be hefty defense costs as well as the payment of the plaintiff’s attorney’s fees and costs generated by the lawsuit.

This is if the lawsuit is based on the numerous employment-related statutes, both federal and state, which provide for reimbursement of such costs. Even if the employer is successful in the defense of the lawsuit, the employer must still bear its own costs of defending the case.

Collective and/or class action lawsuits have also increased in the employment law area. These type cases bring multiple plaintiffs, which clearly increase the exposure to employers.

The challenges that come with going to court have many employers wondering whether to implement arbitration policies to settle employment disputes. In the 1990s, a number of employers began imposing arbitration on non-union, at-will employees as the sole remedy for various common law and statutory claims.

The enforcement of such provisions is in the development stage and being interpreted by Supreme Court and lower court decisions. Yet, considering the alternative downside for employers, dispute resolution mechanisms are still worth pursuing.

The Basics of Arbitration

Typically, an arbitration provision is contained in an employment application, employee handbook, confidentiality and/or covenant-not-to-compete agreement, or, in some cases, simply a written employment contract. Whether an agreement obligates the employee to submit his or her dispute to arbitration is a question of state law.

It is unlikely that an arbitration clause will be binding if the language is ambiguous, unclear, or hidden in small print documents, such as an employment handbook or manual. In determining whether the agreement to arbitrate binds an employee, the waiver of the judicial remedy must be “express, knowing, voluntary,” and, in some cases, “unmistakable.” Wright v. Universal Maritime Service Corp., (S. Ct. 1998).

An agreement to arbitrate should encompass claims arising under employment statutes, etc., not just be limited to claims arising under the contract itself. In some instances, arbitration clauses are deemed to be unconscionable (one sided and show a clear overreaching on the part of the employer).

In these cases, arbitration clauses may be deemed unenforceable. In addition, if the agreement in which the arbitration clause is contained imposes significant deterrents to filing a request for arbitration, such as an employee paying filing fees and costs of the arbitrator, it, too, can be deemed unenforceable as unconscionable.

Accordingly, an arbitration clause should be carefully drafted to avoid the pitfalls mentioned above.

Benefits of Arbitration

Arbitration saves businesses time and money while keeping their reputations intact, but employers favor arbitration over going to court for several other reasons:

• Confidentiality. Arbitration proceedings are private and settled by a neutral third party (i.e. arbitrator). This protects the parties involved from having damaging or false accusations publicly disclosed.
• Faster resolution. Disputes are resolved more quickly than in the court system. Arbitration proceedings are over within months. Litigation can drag on for years.
• Reduced costs. Arbitration typically does not require expensive discovery mechanisms such as multiple depositions, legal motions, briefs, etc.
• No jury. Juries often bring biases into the legal process and frequently end up siding with employees. The advantage of arbitration over a jury is that the arbitrator applies general or specific knowledge of your industry in making a decision.
• Help avoid class action lawsuits. Arbitration clauses, if properly drafted, can eliminate the multiple plaintiff/class action type lawsuits from occurring.
• Binding or non-binding. If the arbitration is binding, the case is over once the arbitrator renders a decision and the parties cannot appeal the decision. The parties do not have to accept the opinion in non-binding arbitration. However, the process is useful for expediting a settlement.

Downsides of Arbitration

In some areas of the country, using arbitration in employment disputes is seen as taking away an individual’s fundamental rights. In short, because of the unequal bargaining powers of the employer versus the employee, an argument can be made that an employee was forced, in essence, to enter into and acquiesce to the provisions of an arbitration clause in order to maintain or secure a job.

In most jurisdictions, an employee may be asked to enter into an arbitration agreement, even if the employee had not agreed to such a provision when hired. The rationale is that the employee’s continued employment in the future is consideration enough to support such an agreement.

Implementing Arbitration Policies and Procedures

The atmosphere in which employees are asked to enter into arbitration agreements is of paramount importance.

The employer should strive to create an environment that fosters knowledge and free will on behalf of the employee. The employer must make clear that the employee has an option to either sign or not sign the arbitration agreement. The employee must understand that there are consequences relative to that employee’s continued employment if he or she does not agree to the arbitration provision.

The employer should explain the rationale for the arbitration agreement and emphasize certain pro-employee factors, such as resolution of an employee claim in a much shorter period of time than in the court system and the privacy of such a proceeding as opposed to the public nature of a court proceeding.

The implementation of the arbitration provision should be obvious and fully disclosed to the employee in every respect to ensure an honest and open environment.

Industries with the Most Employment-Related Lawsuits

Although there has been a substantial increase in employment-related lawsuits over the past 15 years, most of the filed charges of discrimination and/or discrimination-related lawsuits have been in industries with large turnover, such as the fast food and hospitality industries.

Of course, with the increased employee knowledge of employment-related statutes and other laws, no industry is immune from such exposure. Virtually all areas have seen significant increases in these type lawsuits, especially with the decrease of union membership in the last 20 years.