Sure You Can Require Employees to Arbitrate Claims, But Should You?

 California currently permits employers to require workers to submit claims arising from their employment to binding arbitration. Excluded are workers’ compensation controversies or disputes relating to employee benefit plans; but most other disputes, including claims of discrimination, harassment, retaliation and wage-hour violations may be arbitrated, outside of court. Before taking the arbitration plunge, however, I urge my clients to give careful consideration to the following points before requiring their employees to submit to mandatory arbitration.

 

Pros of Mandatory Arbitration

Arbitrator, Not Jury, Decides the Case

The biggest advantage of arbitration for business defendants is the fact that both liability (i.e., whether you did anything wrong) and damages (what is the employee owed) are decided by a single (usually) arbitrator rather than a panel of jurors who are generally relative strangers to the legal process and who invariably bring their own experiences into the decision-making process. Some jurors have concealed bitterness toward institutions in general and employers in particular. They bring this into the deliberations and it injects uncertainty and risk for the employer defendant.

If the claim is submitted arbitration, the parties generally, though not always, agree upon an arbitrator. If the parties cannot agree, there are mechanisms available for the court or an Alternative Dispute Resolution provider to select the specific arbitrator. Any arbitrator I agree upon will be a retired judge with demonstrated expertise in employment law. I spend time researching potential arbitrators and this often includes informal input from other employment lawyers on their experience with the arbitrator.

Arbitrators are typically less likely to inject huge bias against the employer and can be skeptical of an employee’s claims, particularly if they strain credibility. If the arbitrator is a retired judge, he/she will have seen literally thousands of witnesses on the stand demonstrating various degrees of (dis)honesty and will have a much better handle on this than an average juror. Arbitrators are far less likely to award punitive damages and the damages award in general may be more carefully tailored to the facts of the case. Put another way: some jurors don’t know the value of a buck.

Confidentiality

As a general matter, employers tend to prefer not to air dirty laundry in public. Arbitration creates an avenue for private resolution of disputes without making the evidence or outcome public. Sealing testimony, documents or rulings in the civil court system is extraordinarily difficult if a case proceeds through trial to verdict or appeal.

Predictability

When a court schedules a case for trial, this almost always represents the court’s best estimate when it can try the case. It is never set in stone and, as a consequence, a trial can be continued multiple times resulting in duplicative last-minute preparation, increased cost and witness unavailability. Additionally, even when a trial commences, there are long hours where the parties and their attorneys sit in the hallway waiting for the court to attend to unrelated emergency matters, late jurors, late witnesses or other issues.

When an arbitration is scheduled, it is considered a firm date. Not to say that continuances never occur, but it is generally not for the convenience of the arbitrator. Judges are chiefly concerned with the welfare of the jurors; arbitrators are concerned about the convenience of the parties and lawyers, since they rely on lawyers for their reputation and repeat business. Additionally, arbitration hearings can be scheduled as long as the parties are comfortable, generally between 8 or 9:00 a.m. and 5:00 p.m. on successive days, which results in an overall shorter hearing than a trial with continuous interruptions.

Ability to Preclude Class Actions

It is legal to preclude arbitration of class actions. This can be a huge positive for large-scale employers, such as chain retailers, because it prevents employees from banding together and multiplying their claims under a single action. Lawyers interested in pursuing class-action lawsuits are far less interested in pursuing a single plaintiff lawsuit with the same allegations because the upside attorney fee potential is minimal. For most smaller employers, 100 employees or less, this is not as important since meaningful class actions are less common.

No Right of Appeal

As demonstrated below, this is either a pro or con depending on how the arbitration hearing is conducted and the award. However, there are extremely limited bases to seek review of an arbitrator’s ruling or award. This can cut off the right of an employee who is unsatisfied with the award to drag the process (and costs) on and on with one or more appeals.

Cons of Mandatory Arbitration

Cost

Arbitration is incredibly expensive for employers. This is primarily because, under California law, the employer must pay 100% of the arbitrator’s fee. To better understand this burden, consider a recent case in which I spent hours trying to hunt down a high quality, but reasonably-priced, arbitrator for an employment lawsuit involving discrimination and wage-hour claims. I could not find a retired judge below $700/hour and most were higher, with at least one charging $1,200/hour. For a 5-day arbitration hearing—which is not overly long if there are witnesses—my client was required to deposit approximately $50,000 three months before the arbitration hearing date. This is money that, regardless how well my client did at the hearing itself, it would never see again. Arbitrators cannot order a losing employee to pay any part of the arbitration fees to the employer. In my humble view, this cost can amount to denial of due process.

Study Suggests Employees Actually Do Better in Arbitration

Notwithstanding my suggestion that arbitrators tend to be more conservative than jurors, a 2019 study by the U.S. Chamber Institute for Legal Reform found that employees actually do better in binding arbitration.

No Right of Appeal

If the arbitrator makes a ruling that is against the applicable law, and it harms the employer’s case, there is no way to challenge the ruling.

Inability to Control Admission of Certain Evidence

This factor may or may not be important. However, if there is a very bad piece of evidence for the employer, such as an email or a hearsay statement that would not, under proper application of the rules of evidence, be seen or heard by the trier of fact (i.e., the jury), it is effectively impossible to prevent the arbitrator from knowing about it, since he/she must know about it to decide whether it is admissible. If he/she excludes it as evidence, while he/she should not consider it, as a practical matter there is no way to “un-ring the bell.”

Loose Application of the Rules of Evidence

Some arbitrators do not rigidly apply the rules of evidence. This injects uncertainty into the hearing and outcome, which is not usually good for employers.

Conclusion

On balance, I believe arbitration is a fantastic way to resolve disputes rapidly, particularly for large-scale employers where cost is less of a factor, preventing class actions is a major concern or where confidentiality is important. For employers that do not strictly fit this description, however, I cannot recommend mandatory arbitration because even the smallest dispute is likely to cost tens of thousands of dollars in arbitrator’s fees. As a consequence, an employer can be forced to settle a defensible case because it will cost more to pay for the arbitration.

Employers wishing to further explore this question should contact their experienced employment law counsel or [email protected]

 

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