Employment Arbitration

arbitrationAuthored by Steve Holden. Published in the Sacramento Business Journal October 2014.

Opinions on the pros and cons of employment arbitration vary widely:

  • “Arbitration is the best way to avoid runaway jury verdicts.”
  • “Arbitrators tend to split the baby instead of following the law and picking a winner and loser.”
  • “Arbitration is the best way to reduce the cost of employment litigation.”
  • “Arbitration tends to be more expensive today than traditional litigation.”

There’s a reason for these different perspectives. While arbitration may be an excellent way to resolve disputes, it is not a one-size fits all solution. Multiple factors must be considered. Each employer should carefully consider the factors, but also understand that under any given set of circumstances the factors may not play out as anticipated.

Brief History

Twenty-five years ago, California employers could require employees to sign arbitration agreements that were highly favorable to the employer. The agreement could shorten the time limit for an employee claim, put a cap on recoverable damages and block any punitive damages. The agreements also required the employee to split the cost of the arbitration with the employer. This employer-advantaged environment changed in 2001 with a significant California Supreme Court decision and has continued to evolve into an environment where only employer-employee neutral agreements will be enforced and where the employer must pay for the arbitrator.

Potential Advantages

The advantages of arbitration are merely potential advantages.  Just as with the disadvantages discussed below, there is no guarantee that on any given set of facts the advantages or disadvantages will materialize.  In fact, an anticipated advantage may turn out to be a disadvantage and vice-versa.

The most familiar advantage of arbitration is speed. Civil litigation is a cumbersome process with many rules and procedures that dictate a snail’s pace. And because time is money, this also raises the cost for employers. Arbitration is designed to bypass some of the formal procedures to achieve quicker resolution. Recent court decisions have even made it possible to use arbitration to avoid class-action lawsuits and the extreme cost associated with them.

Privacy is an often-cited advantage to arbitration. While court records and proceedings tend to be open to the public, arbitrations are typically conducted outside of the public eye. Unfortunately, this potential advantage may be going away. A new law was passed this year requiring arbitrators to make public disclosures about the arbitrations they conduct.

Another potential advantage is the use of a decision-maker who is a subject-matter expert or at least well-versed on the law — as opposed to a jury. Many employers and defense attorneys want to avoid a jury because it is generally not comprised of the employer’s true peers and because they believe an arbitrator is less likely to be swayed by sympathy or other non-legal factors in making decisions about liability and damages.

Potential Disadvantages

While there is a perception that arbitrators will be legal experts and less swayed by emotion, they are not bound to the law in the same way as judges. They can essentially do what they want regarding legal standards and precedents.

Another concern over requiring employees to arbitrate disputes is the possible unintended consequence that an arbitration agreement may turn every dispute covered by the agreement into a serious issue that must be resolved through a formal, costly legal proceeding. While the concern is valid, careful drafting of the agreement can alleviate this potential problem.

Employers also voice concern that arbitrators tend to “split the baby” instead of making hard decisions the way courts do on dispositive motions. The concern is legitimate given that most arbitrators spend even more time mediating disputes and advocating the benefits of mediating disputes. The mediation process is by definition a “split-the-baby” proposition, and the arbitrator’s experiences with and opinions about mediation could certainly creep over into arbitration decisions.

Finally, there are no second chances. In all but the most limited of circumstances, the arbitrator’s decision is final.  A bad decision cannot be appealed. This finality contributes to the efficiency of arbitration, but if you get an unfavorable decision, this could be a serious disadvantage.

Balancing all of these considerations, most employers tend to favor arbitration. You should not, however, jump into an arbitration agreement without careful consideration and should only use an agreement that has been expertly vetted to meet your specific needs and the legal requirements for enforceability.