Instead of utilizing the court system, many employers use arbitration to resolve disputes that arise with a disgruntled employee. The employment agreement itself may contain a provision that specifies the right to arbitrate, or the employer may have a separate document that outlines this choice. But what exactly is arbitration? More importantly, what are the benefits and burdens of choosing arbitration? These are questions every employer should consider.
What is Arbitration?
Arbitration is an alternative to traditional litigation whereby a business requires its employees or consumers to agree to arbitrate legal disputes instead of pursuing a civil action in court. Companies frequently include arbitration clauses in contracts for products and services such as cellphones, credit cards, rental cars, and nursing home care. The Federal Arbitration Act (“FAA”) governs arbitration proceedings and ensures that dispute resolutions do not devolve into a Wild West scenario. While an agreement to arbitrate may seem consensual, the choice may very well become a mandatory requirement for the potential candidate to secure employment. Additionally, many arbitration clauses require the employee to waive statutory rights. In fact, such language is usually in bold face type or perhaps slightly larger than the other type. While arbitration agreements can be set forth in separate documents such as employee handbooks, employers also include the waiver language in the contract the employee actually signs. These practices are designed to ensure that the employee is fully aware of the waivers.
The following is an example of a boilerplate arbitration clause:
[EMPLOYER] and [EMPLOYEE] agree that any dispute between them arising out of or related in any manner to the employment of Employee by Employer, will be subject to final and binding arbitration. The parties agree that such final and binding arbitration shall be the EXCLUSIVE REMEDY in any such dispute which arises from or is related in any manner to Employee’s employment by Employer, including, without limitation, the question of discharge for just cause and claims of discrimination. Employee understands and agrees that by signing this agreement EMPLOYEE EXPRESSLY WAIVES ANY RIGHT TO LITIGATE IN STATE OR FEDERAL COURT, TO PURSUE ADJUDICATION BY AN ADMINISTRATIVE AGENCY, OR TO UTILIZE ANY OTHER MEANS OTHER THAN FINAL AND BINDING ARBITRATION CONDUCTED IN THE MANNER EXPLAINED IN THE EMPLOYER’S POLICY. A COPY OF THE ARBITRATION POLICY IS ATTACHED HERETO AND MADE A PART HEREOF.
Although other provisions will provide more detail regarding the rights of each party under the arbitration provisions, the contract must expressly stipulate the agreement to arbitrate. Additionally, employment contracts which contain mandatory arbitration provisions are legally enforceable. Not only can an arbitration provision prevent individual claims from employees, but it can also prevent class action lawsuits as well. As a result, arbitration can provide an employer with various advantages. But before an employer decides to require employment arbitration, it should weigh the advantages and disadvantages of such a decision.
Advantages of Arbitration
Arbitration has many potential advantages. For example, arbitration avoids a jury trial. This may be a significant benefit to an employer, especially when jury pools primarily consist of employees of some sort who may be biased against an employer. Another advantage is the use of an arbitrator. An arbitrator is the independent person chosen to settle the underlying dispute. In most cases, the arbitrator is an expert in the particular field, and will not likely be persuaded by emotionally-charged facts. Additionally, an arbitrator may be less likely to order a large punitive damages award in the same manner that a jury would.
Another advantage of arbitration is that the entire procedure affords more privacy for the parties. Unlike filing a routine lawsuit that is a matter of public record, arbitration settles a dispute with no court or other public filing. This may be particularly appealing to an employer which seeks to maintain a certain public image.
Disadvantages of Arbitration
While arbitration can be beneficial, there are disadvantages as well. For example, arbitration usually does not have the same discovery process or evidentiary rules as a civil case would have. In fact, hearsay is acceptable evidence in an arbitration proceeding, which can become an issue. Additionally, the amount of information each party can obtain from the other prior to hearing is extremely limited. Also drastically different from the court system, the decision of the arbitrator is final; therefore, whoever loses the decision cannot appeal. An arbitrator’s mistake of law is not a ground for vacating the arbitration award. Another disadvantage may be the cost, which in some cases can become more expensive than civil litigation. Also, parties are responsible for their own attorney’s fees and costs; whereas civil litigation creates opportunities where the prevailing party may be entitled to its attorney’s fees.
Another disadvantage regarding arbitration provisions may arise in its drafting. If an employer simply uses a generic, boilerplate provision, the agreement may not cover important circumstances that the employer needs to cover. Also, a poorly drafted arbitration clause can compromise enforceability. Some courts have found an arbitration clause to be unenforceable as adhesionary, while others have held an arbitration agreement that failed to identify any forum or process for conducting the arbitration was invalid due to the lack of mutual assent.
Employers should be mindful of the disadvantages and pitfalls of choosing arbitration. Arbitration can be an attractive alternate to litigation for an employer under particular circumstances. However, before deciding to require an agreement to arbitrate as a condition to employment, an employer should be certain that arbitration is a better method of protecting itself than would be civil litigation. Once the employer decides to require an arbitration provision, it should consult with an experienced attorney to ensure the terms of the provision do not create enforceability issues.