Effective arbitration Featured

7:00pm EDT January 26, 2009

During the course of the last decade, it has become increasingly common for employers to have employees sign arbitration agreements, binding contracts between the two parties in which they agree to refer employment disputes, such as wrongful termination and discrimination claims, to a private arbitrator instead of filing them in court.

“The last decade has provided the legal community with enough time to develop a clearer picture of the advantages and disadvantages of employment arbitration agreements,” says William J. O’Neill, member and chair of the litigation department at McDonald Hopkins LLC. “At first, employers thought they were a cure-all. That’s not the case. However, in many cases, they are effective.”

Smart Business asked O’Neill and his partner, Douglas B. Schnee, member and co-chair of the labor and employment practice, about the pros and cons of employment arbitration agreements.

What are the advantages of resolving claims through arbitration?

The primary advantage is cost. Arbitration is designed to be a streamlined and effective process taking several months versus the court system, which can go on for several years. Arbitration often involves less discovery, the filing of only a few pleadings, and lower attorney fees.

Also, the employer saves time. Many court systems face very clogged dockets. In theory, arbitration can move quickly. Another advantage is privacy. When a case goes to court, it is a matter of public record and the media has the right to be present. Arbitration goes on privately behind closed doors, outside of the public eye, and can help a company avoid unwanted publicity. Another advantage is predictability. Awards tend to be more practical than what a jury might award, as arbitrators are typically attorneys or hired judges.

Are there pitfalls in going to arbitration instead of court?

Arbitration can avoid the risk of a runaway jury award, but at the outset, the employer could spend a lot of money just trying to enforce the arbitration clause. This doesn’t always happen, but it can because employees often will attempt to take the case to court versus arbitration. For example, the employer could end up spending $25,000 to $30,000 to litigate the issue of enforceability of an arbitration clause just to find out that, yes, it is enforceable.

Then you have to consider the costs to file and pay the arbitrator. The typical filing fee to start the process with a service such as the American Arbitration Association can be thousands of dollars, versus the filing fees for what you would spend if the case went to court, which are only a couple hundred dollars. With arbitration, the employer ends up paying the filing fees. If the case goes to court instead, the employee typically pays the filing fees. In court, obviously you don’t have to pay the judge by the hour. In arbitration, the arbitrator gets paid perhaps $200 to $500 per hour, including for all the time spent in prehearing conferences, etc.

The employer must be aware that arbitration agreements do not prevent employees from filing claims with agencies such as the U.S. Equal Employment Opportunity Commission. Also, there is only a limited right to appeal an arbitrator’s decision, but with a jury, there are several avenues of appeal. Another pitfall would be if the agreement were found to be unenforceable.

What should an arbitration agreement contain to be enforceable?

The agreement needs to be very clear. At its heart, it needs to be fair and not one-sided. The court will reject and find it unenforceable if it contains things such as the employee has to bear all the costs or the employer has the exclusive right to select an arbitrator. Something unfair and one-sided could include some language along the lines of ‘the employee has two hours for arbitration and can only be awarded a maximum of $10,000 in damages.’

Everything should be transparent and the document needs to be a separate agreement signed by the employee — not something buried on the employment application or in the employee handbook. It should be very clear and not contain a lot of legalese. If the average person can’t understand it, a court could find that the employee ‘did not make a knowing decision’ in signing it, and this could find the agreement unenforceable.

In spite of the risks, are arbitration agreements advisable?

If you asked employers what they thought of arbitration agreements, you would get mixed responses. At the end of the day, a runaway jury award is what employers fear. If employers are willing to trade higher filing fees and the expense of an arbitrator for potentially lower attorney fees and lower risk of runaway jury awards, these agreements could be effective. Some have been surprised by the initial filing fees for arbitration and the fees for the arbitrators’ services. Arbitration agreements can be less expensive in the long run but are not necessarily inexpensive. The short answer is it depends on the individual circumstances of the employer or business. If the employer recognizes that arbitration agreements are not a cure-all for claims, then they can be a very effective tool in reducing litigation costs, avoiding risks of jury trials, and perhaps streamlining the process of resolving employee-related claims.

WILLIAM J. O’NEILL is a member and chair of the litigation department at McDonald Hopkins LLC. Reach him at (216) 348-5755 or woneill@mcdonaldhopkins.com. DOUGLAS B. SCHNEE is a member and co-chair of the labor and employment department at McDonald Hopkins LLC. Reach him at (216) 348-5720 or dschnee@mcdonaldhopkins.com.