Why Every Employer Should Consider Using Arbitration Agreements

The three key documents that every employer should provide to their employees (in addition to various new hire documents required by law) consists of an employee handbook, a confidentiality agreement, and an arbitration agreement.  An effective arbitration agreement is the key to keeping employment-based claims out of court, significantly minimizing your attorneys’ fees should an employee file suit, and preventing runaway jury awards.

Contractual arbitration is a voluntary process by which employers and employees agree to submit their employment related disputes to binding resolution by an impartial arbitrator instead of having the case decided by a judge or jury in the court system. One of the chief advantages of arbitration for employers is the resolution of employment disputes before a professional arbitrator (usually a retired judge), instead of by a jury. This is important because California juries tend to be predisposed to finding in favor of employees based on highly charged facts in cases involving wrongful termination, harassment, retaliation and discrimination.  Experienced arbitrators, on the other hand, are inclined to decide cases based on an objective application of the law instead of based on inflammatory facts and allegations.

A Cornell University study on employment arbitration cases in California found that employers win cases more often in arbitration than in court, and that when employees do win their cases in arbitration, their awards are “substantially lower than award amounts” reported in court.

For similar reasons, taking employment disputes out of the hands of a jury also tends to lead to smaller settlements. The fact is that most cases end up settling, whether they are filed in court or in arbitration. However, cases tend to settle for less when the matter is in arbitration instead of court because there is no risk that an impassioned jury will award a plaintiff a runaway damages award based on highly charged and emotional facts, rather than being based on a dispassionate application of the law.

Arbitration also allows for relatively quick resolution compared to the court system. In court, there are all sorts of motions that could be filed that delay resolution and rack up attorneys’ fees.  This tends to be minimized in arbitration, which provides for more streamlined proceedings. Arbitrators also have nowhere near the number of cases that a judge has, permitting the arbitrator to spend more time focusing on your case, and in a timely manner.  Going to trial in the court system could cost you around a quarter of a million dollars in legal fees (or more), and that is just for the trial itself and does not include any of the time-intensive work leading up to trial, such as engaging in discovery, arguing and drafting motions, taking and defending depositions, etc.

However, arbitration is not free, and in California, employers must pay the entire cost of the arbitration proceeding (although each side pays for their own attorneys). There may also be strategic reasons an employer would rather use the court system instead of arbitration. (For example, an employee’s claims might be so baseless on their face, that it may be quicker and easier to attempt to have the case dismissed in court.)

However, employers are generally much better off having workplace disputes litigated in arbitration rather than in court.  (Here is a great New York Times article on the benefits to employers of arbitration.)  And if for some reason down the road, you get sued by an employee and for strategic reasons with your attorneys decide you’d rather stay in court for that particular case, you and the employee can simply agree to set aside the arbitration agreement and proceed in court. In all my years of practice, I never once saw a plaintiff who wanted to go to arbitration (due to all of the reasons above), as they almost always prefer to stay in court because of the potential for a big payday.

Action Items for Employers:

• Companies should routinely audit their agreements and practices to make sure every employee has signed an enforceable arbitration agreement.  It is important to have your arbitration agreements reviewed annually by experienced employment law counsel to ensure they are up to date with current state of the law. The subject of arbitration agreements is a frequently changing area of the law, particularly in California. As such, an arbitration agreement that was valid when it was drafted even a year ago may be unenforceable today.
• As I have written about elsewhere, if your employees have limited proficiency in English, make sure to provide them a translated agreement in the language they speak, because a court will likely invalidate your English language agreement!