United States: Should I Have My Employees Sign An Arbitration Agreement?

On a regular basis, I am asked whether companies should have their employees sign arbitration agreements.  Generally, I am in favor of arbitration agreements.  But, before deciding that arbitration agreements are for you and your business, you should consider the pros and cons, costs, legal issues, etc.

What is Arbitration?:  Many times, people confuse mediation and arbitration.  Mediation is a voluntary meeting where a neutral person attempts to facilitate the resolution or settlement of a dispute.  However, the mediator does not have any authority to make any participant do anything they do not want to do.

Arbitration is an alternative to court litigation.  This is a binding way to resolve disputes.  If parties subject themselves to arbitration, they are bound by the decision the arbitrator (basically a private judge) makes.  And, that decision can only be appealed in very limited situations.

Costs:  Although hiring an arbitrator can be expensive, many employers believe that the total legal fees and costs expended in arbitration are typically lower than those spent in a traditional court case from start to finish.  Sometimes savings occur due to limited discovery, fewer motions and hearings, or even discounts on EPLI premiums.  But, this is not always true.  Arbitrations can sometimes be just as pricey as litigation in court.

While arbitrations may, on average, be less expensive, they are not cheap.  Some believe that if you have an arbitration program, employees are more likely to sue.  Additionally, companies are required to pay most of the fees to ensure that arbitration is not cost-prohibitive for an employee.  These expenses can run into the thousands of dollars very quickly.  Once again, some employers are concerned that employees may find all of this appealing since they bear very little of the cost.

Speed:  Arbitrations are typically faster than court litigation.  Arbitrations are often resolved in less than a year.  Litigation in the court system, depending on where you are located, can last anywhere from six months to several years.

Confidentiality:  Another appealing part of arbitration is the confidentiality of the proceedings.  Unlike court cases which are typically open to the public, arbitrations typically are not and the decisions often are not published.  This helps minimize the risk of "copy cat" lawsuits as well as unwanted press.

But, arbitrations are not always confidential.  On some occasions, plaintiffs' attorneys will first file their case in court, requiring that the employer ask the court to send the matter to arbitration.  While courts typically do this if the agreement is properly prepared, the initial filing is public and this can generate publicity.

No Jury:  Employers may prefer arbitration because there is no jury.  Some speculate that jurors identify with employees and are predisposed "against" a company.  Leaving the decision to an arbitrator relieves concerns for some about runaway jury awards.  Most believe that experienced arbitrators are more realistic than juries when valuing damages to be awarded.

State Law Issues:  There are a number of legal issues that employers need to consider before entering into an arbitration agreement.  Because arbitration agreements are contracts, state law can have an effect on how they should be created.  Therefore, you or your employment lawyer need to consider the states' laws where you plan to use the agreement.

State law issues, for example, include how to enter into arbitration agreements with existing employees.  When entering into a contract, by law, you must provide the other side something of value.  This is often referred to as "consideration."  When it comes to existing employees, some states will not allow continued employment to serve as the consideration.  This means that the employer must give something else of value to its existing employees if it wishes for them to be bound by the arbitration agreement.

One-Sided Agreements Not Allowed:  In some parts of the United States, courts focus on whether agreements are "unconscionable" or so one-sided that they should be void as a matter of public policy.  To address this, courts typically require that arbitration agreements be mutual.  In other words, both  the employer and the employee are bound by the agreement.  Additionally, many employers include an opt-out provision which allows employees to back out of the arbitration agreement within a certain time period after employment begins.  If they opt-out and later sue, they are not bound by the arbitration agreement.

Class Action Waivers:  Another issue to consider is class action waivers.  If your company is sued in a class or collective action and your employees have signed an arbitration agreement that includes a class action waiver, you may be able to get the class action dismissed.

But, this will not likely be the end of the legal dispute.  The National Labor Relations Board (NLRB) has taken the position that an employer violates the National Labor Relations Act (NLRA) when it requires employees, as a condition of employment, to sign an agreement that precludes them from filing joint, class or collective claims addressing wages, hours or working conditions.

Under the current state of the law, the NLRB considers these agreements to be illegal and to violate the NLRA.  On the other hand, most of the federal circuit courts of appeals to address these have upheld the agreements.  This means that until the U.S. Supreme Court rules, including such a clause, though advantageous, may subject you to litigation with the NLRB.  However, you may decide that the benefit of including this provision (namely avoiding expensive class action litigation) outweighs the potential cost of litigating with the NLRB.

Conclusion:  When it comes to employment litigation, there is no one-size fits all answer.  While there certainly are some practical and legal hurdles to consider, if you can afford the potential expense associated with arbitrating cases, arbitration agreements with your employees are still worth considering.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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