Agreements to Arbitrate

HR Magazine, August, 2001 by Jonathan D. Wetchler

Forcing an employee's hand may not be your best bet.

The U.S. Supreme Court has given a substantial boost to a growing trend: Requiring employees to arbitrate, rather than litigate, employment disputes--particularly for claims of employment discrimination.

In Circuit City Stores, Inc. v. Adams, 121 5. Ct. 1302 (2001), the court held that the Federal Arbitration Act, which requires the enforcement of valid arbitration agreements, applies to most employment contracts and exempts only those employment contracts that involve transportation workers.

As a result, properly drafted agreements that require the arbitration of employment claims now are clearly enforceable.

Lured by the dual prospects of lower litigation costs and avoiding "runaway juries," many employers have seized the opportunity to require employees to arbitrate their claims and forego their right to file suit.

But rushing into arbitration isn't necessarily the best bet in every situation. This article describes 10 issues employers should consider when determining whether to require arbitration or when structuring arbitration agreements.

#1: Whether to Require Arbitration

Perhaps the most important issue for employers to consider is whether or not they should require arbitration at all.

Initially, it may be hard to find a reason not to arbitrate. After all, arbitration generally involves less discovery and formal procedural requirements than court litigation, with a commensurate reduction in legal paperwork--and expenses.

While arbitration generally costs less than litigation, it also imposes two costs that typically are over-looked. First, the factors that make arbitration more economical for employers apply equally to prospective plaintiffs. As a result, requiring arbitration may increase the likelihood that employees will bring claims against their employers, and this may increase the likelihood that employers will face more marginal cases.

Second, it often is more difficult to have frivolous claims dismissed by filing a motion in an arbitration proceeding than in federal court. Accordingly, employers may find themselves arbitrating cases that might have been summarily dismissed in court.

The lack of an effective mechanism for dismissing legally deficient claims by motion can be particularly detrimental to employers, given that some arbitrators try to resolve disputes in King Solomon-like fashion by "splitting the baby."

In another way, the lower cost of arbitration also may work against employers, whose "deeper pockets" can be more of an advantage in court litigation. In formal litigation, employers can gain a strategic advantage by litigating aggressively, which can include motion practice as well as taking more (or more complete) depositions and serving more numerous and comprehensive written discovery requests.

But, typically, employers are more than happy to achieve the cost savings arbitration provides, even if it means not taking full advantage of their superior economic resources.

Which employers should require arbitration? Employers facing a steady stream of claims--and particularly those with a track record of expensive settlements or adverse verdicts--may find arbitration to be a more cost-effective tool than litigation. The same is true for employers that cannot afford the economic burdens of employment litigation.

However, for employers that can afford the cost of litigation and do not have a history of prior employment litigation, the case for requiring arbitration is not compelling.

#2: Limitations On Remedies

Some employers may be tempted to limit what employees may recover through arbitration--by, for example, setting caps on damages or eliminating certain remedies altogether, such as punitive damages. Provisions of this kind, however, are inadvisable. By limiting these rights, employers run the risk of rendering the arbitration agreement legally unenforceable.

For an arbitration agreement to be enforceable, employees must be able to recover the same remedies available to them in court. To enhance the likelihood that an agreement will be legally acceptable, the agreement should state that the arbitrator will have the power of a court of law and equity.

#3: Loser-Pays Provisions

Many employers that face claims under fee-shifting statutes, such as the Age Discrimination in Employment Act and Title VII of the Civil Rights Act of 1964, believe that these laws provide plaintiffs with an unfair advantage: If the plaintiff wins, the employer pays the plaintiff's legal fees; if the employer wins, the parties bear their own fees.

This perception of unfairness is exacerbated by the fact that substantial fees may be awarded even if the plaintiff receives a relatively low damage award.

The courts have yet to agree on the legality of arbitration clauses that require the losing party to pay the fees of the prevailing party in equal employment opportunity cases. Such clauses would, arguably, level the playing field by permitting victorious employers to recover their counsel fees.