Employers are well aware of the fact that disputes with employees can result in expensive lawsuits and unfavorable jury verdicts that make newspaper headlines. In order to avoid claims from employees, most companies make a strong effort to comply with applicable laws and to utilize state of the art human resources practices. Unfortunately, even the best efforts of employers to “do it right” are not always enough to prevent employees from asserting claims of unlawful conduct.
Arbitration has become an attractive option for many employers wary of the prospect of defending costly lawsuits before juries often comprised largely of employees unsympathetic to companies. Yet the decision to adopt an arbitration agreement is rarely a simple one, as there is no “one-size-fits-all” solution. While arbitration can offer many advantages over traditional litigation, it also presents disadvantages that may not align with every employer’s goals or risk profile. Understanding both the benefits and draw-backs of arbitration is essential for employers to make an informed decision about whether requiring employees to resolve claims through arbitration is the right choice for their workplace.
The Advantages of Arbitration over Traditional Litigation
Arbitration offers many distinct advantages relative to traditional litigation in court before a judge and a jury:
- Avoidance of a trial by jury. The most fundamental difference between arbitration and traditional court litigation concerns the identity of the decision-maker. Most arbitration agreements provide for resolution of disputes by either a single arbitrator or a panel of three arbitrators; neither party has a right to trial by jury. A trained, experienced arbitrator is often viewed as more likely to apply the law in an objective manner and to be more fair in their decision making over a jury comprised of persons more likely to identify with the employee than with management and more easily swayed by emotions.
- Potential to limit or eliminate class action lawsuits. A major advantage of arbitration is the opportunity to preclude employees from asserting class action or representative claims. Class action suits alleging violations of wage and hour laws have increasingly plagued employers and can threaten the viability of some businesses, so the ability to insulate oneself from a class action suit is a compelling factor for many companies that consider requiring employees to resolve claims through arbitration.
- Increased privacy. Unlike court proceedings where the trial is open to the general public and most documents filed are public, arbitration proceedings are typically private. The filing of an arbitration claim and ultimate arbitration award do not necessarily become part of the public record and the arbitration hearing is private. As a result, the potential for adverse publicity arising from a dispute or following an adverse decision is much lower in arbitration than in court litigation.
- Potential for more rapid resolution. Arbitration often involves fewer and shorter pre-trial proceedings than court litigation. In addition, the parties can often exert greater control over scheduling than is possible in courts overburdened with heaving caseloads and more limited resources. As a result, parties can often resolve disputes through arbitration more rapidly than through traditional litigation.
- Potential to reduce legal fees. Due to the diminished role of preliminary proceedings such as motions and discovery, as well as the absence of processes surrounding a jury, the cost of attorney’s fees may be lower in arbitration where the procedures tend to be more streamlined than in court.
The Disadvantages of Arbitration over Traditional Litigation
Although there are many advantages of arbitration, other aspects of arbitration can be disadvantageous and should be considered carefully before deciding whether to adopt a policy requiring employees to resolve claims through arbitration:
- No right to appeal. Except in the case of fraud or corruption in the arbitration process, arbitration decisions are generally not subject to appeal. While the appellate courts exist to provide parties aggrieved by errors during trial in court with an avenue to rectify those errors, arbitration awards are generally final and not subject to challenge merely because an arbitrator’s decision may be inconsistent with applicable law or inadequately supported by the evidence.
- Rules of law may not be applied strictly. Judges and juries are bound to apply the law when resolving disputes litigated in court. In the arbitration context, however, rules of law have traditionally been viewed as offering guidance to the arbitrator, rather than controlling the decision. Many arbitrators consider it their right to impose their concept of justice upon the parties, which may mean that they are disinclined to decide cases based upon technical legal defenses (such as the statute of limitations) or to exclude evidence disadvantageous to employers that would be inadmissible in court. (An arbitrator’s reluctance to apply rules of law strictly is a double-edged sword that can also work in favor of an employer in certain circumstances, however.)
- Unavailability of dispositive motions. In some cases, employers may be able to defeat an employee’s case prior to trial, usually through a motion that challenges the sufficiency of the employee’s case on legal or evidentiary grounds. Arbitrators are typically less inclined to entertain or grant such motions than are judges, however. For this reason, employers subject to arbitration agreements may be forced to participate in full hearings in cases which could be resolved through a pre-trial motion if they were litigated in court.
- Payment of arbitrator’s fees. The parties to an arbitration agreement must pay the arbitrator for the time he or she spends presiding over the case. In many states, the employer must generally bear the arbitrator’s fees, and cannot require the employee to bear any portion of them, even if the employer prevails in the case. Depending on the nature of the case, the length and complexity of the proceeding and the expertise of the arbitrator, fees may be substantial and could offset most or all of the legal fees saved by avoiding court litigation. Further, many states also place a heavy burden on employers to timely pay the arbitrator’s fees with the risk of late payment jeopardizing their ability to remain in arbitration.
- Potential complications in trade secret and unfair competition cases. Arbitration agreements in many states generally must apply mutually to employers and employees so as to require both to resolve their claims in arbitration. Employers most often assert claims for misappropriation of trade secrets or unfair competition against former employees, and often seek remedies such as temporary restraining orders at the inception of a case. Courts can issue temporary restraining orders on the same day a lawsuit is filed, but the process of obtaining a temporary restraining order or preliminary injunction through an arbitrator is much more time-consuming. Some arbitration agreements exclude claims for misappropriation of trade secrets or unfair competition from their scope, or permit the parties to seek temporary restraining orders in court before ultimate resolution of the case through arbitration, but the enforceability of such provisions can be subject to challenge.
- Potentially detrimental effect on morale. For the reasons described above, arbitration is generally imposed by the employer upon the employee. To the extent that the employer is concerned about preserving goodwill in its relationship with employees, the employees’ attitudes toward arbitration may make it less attractive as a means of resolving disputes.
- Enforceability may be challenged. Although courts generally favor arbitration agreements and are reluctant to overturn arbitration awards, they have demonstrated a willingness to find arbitration agreements unenforceable in various circumstances, particularly if the agreement gives one party an unfair advantage over the other. Since parties seek arbitration as a means of resolving disputes more rapidly and at a lower cost than court litigation, the prospect of litigating the enforceability of an arbitration agreement before litigating the merits of the dispute in question is unattractive. The law regarding arbitration agreements also changes frequently, so an agreement that is valid at one point in time may not be valid a few years later.
If you have questions about whether using an arbitration agreement is right for your company or have not had your arbitration agreement reviewed recently for compliance with current law, please contact your regular Lathrop GPM attorney.