Should employers consider the inclusion of a mandatory arbitration clause in their employment agreements?
Like most questions asked of lawyers, the answer is “it depends.” That said, employers should at least raise this issue with their counsel. In many instances, a mandatory arbitration clause may reduce the risk of an oversized jury award and lower overall litigation costs, and therefore be of great benefit to a company’s bottom line.
This article addresses some of the pros and cons of an employer’s use of an arbitration clause rather than having its disputes litigated before a jury.
Costs – Favors Arbitration
While the arbitrator charges an hourly fee and a judge and jury do not, an arbitration is generally less expensive than a jury trial. The main reason is that, except under extreme circumstances, there is no ability to appeal an arbitration award. Thus, arbitration avoids the significant costs associated with an appeal. In addition, substantial lawyer fees are expended on issues related to jurors and, in particular, the jury selection process. These fees are avoided in arbitration. Parties can also agree upon an arbitrator with expertise in the relevant business or industry. If so, the parties can potentially lessen the fees associated with expert witnesses and other types of testimony and evidence typically necessary to educate a jury on the relevant subject matter.
It is important to note that, for an arbitration clause to be enforceable, the employer will typically have to agree to pay the employee’s arbitration-related fees, other than the initial filing fee. The vast majority of these fees relate to the hourly rate of the arbitrator. They do not include the employee’s attorneys’ fees.
Speed and Flexibility – Favors Arbitration
As discussed above, the primary reason for the overall faster result in arbitration is the lack, in most cases, of any appeal process. In addition, there is usually more flexibility in the scheduling of matters in arbitration, as the parties have essentially hired the arbitrator to hear their case, while a judge has an overflowing docket and no business reason (other than re-election) to show deference to the personal schedules of the parties.
However, the lack of hard deadlines can sometimes be a burden, not a benefit. Accordingly, in arbitration, the employer will be less able to hold the employee’s “feet to the fire” with a hard deadline.
Notably, arbitration loses to the courtroom in one important area—the ability to obtain immediate, albeit temporary, injunctive relief. In court, when faced with imminent and irreparable harm, parties can file for a temporary restraining order or other immediate relief, sometimes as quickly as the day they learn that the harm has occurred or has been threatened. If such harm is proven, a judge has the power to order the parties to maintain the status quo pending a hearing and also has the power to order the status quo to remain in place until trial. An arbitrator does not have this ability.
However, parties can avoid this downside. Even if the parties agree to arbitration, they can still agree that they may seek temporary relief in court initially (if permitted by law), with subsequent proceedings referred to arbitration. This eliminates most, if not all, of the downside of arbitration with respect to speed and flexibility.
Identity and Expertise of Decision Maker – Neutral
The parties have the ability to select the arbitrator, whereas a judge is assigned to them. In addition, the parties can select the arbitrator based on industry expertise. These benefits seem to favor arbitration.
Unfortunately, while the vast majority of arbitrators have a legal background, including as former judges, an arbitrator may still lack the legal expertise of a sitting judge. If the arbitrator makes a mistake on the law or evidence, there is essentially no ability to appeal or challenge the decision. The appeal process, on the other hand, provides multiple levels to address an incorrect decision by a lower court.
Despite the edge in legal expertise that many sitting judges would have, an arbitrator can be sufficiently trusted to make a reasoned decision in most cases.
Right of Appeal – Neutral
The ability or inability to appeal is also a neutral factor. Depending on the result in arbitration, the inability to appeal is either a benefit or a significant burden.
Privacy and Confidentiality – Favors Arbitration
Courtrooms are open to the public. If confidential or trade secret information is at issue in a case, parties must spend fees—sometimes substantial—on protective orders, motions to seal and similar items to protect their information from the public or the media.
In arbitration, matters are typically private and confidential. Generally, this will favor the employer. However, the lack of a public ruling may result in the employer’s inability to use a judgment against one employee as a deterrent to similar conduct by other employees. If the use of litigation as a deterrent for employee behavior is important to an employer, arbitration will likely not provide this result.
Discovery Procedures – Neutral
In court, parties have full access to all discovery procedures, whereas discovery is often more limited in arbitration. On the other hand, full access to discovery often results in significant cost and expense.
Rules of Evidence – Favors Trial
In court, the rules of evidence apply. This allows parties to prevent the jury from considering (and sometimes seeing or hearing) hearsay and other unreliable forms of evidence.
In arbitration, the rules of evidence are more relaxed, and the arbitrator will likely have less experience in understanding, let alone applying, the rules of evidence. Thus, shaky evidence is more likely to be allowed in an arbitration, and the employer must understand and accept this risk.
Avoidance of Oversized Award – Favors Arbitration
The chance, however slight, to avoid an outsized jury award is a factor for the employer that heavily favors arbitration.
Because the employer is paying for the arbitrator, and because the arbitrator will likely want the employer to choose him or her again for future proceedings, even in a very bad case for the employer, the arbitrator will be more likely to split the difference than a jury.
In trial, the employer has very little control, relatively speaking, of the composition and makeup of the ultimate fact finder—the jury. There is always a risk that jurors will be more sympathetic to an employee than to an employer. There is also a risk that a juror (or jurors) with significant prejudice towards the employer or the employer’s type of business could end up on the panel. In either of these cases, there is a greater risk of a massive award being entered against the employer (including punitive damages) in a trial than in arbitration.
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As you can see, the issue of whether to include a mandatory arbitration clause in a company’s employment agreements is a complex one. Nevertheless, it makes sense raise this issue with counsel, as there is a chance that an arbitration clause could save an employer from a great deal of time, expense—and headache—compared to a trial by jury.
John R.W. Fugitt is of counsel with Bell Nunnally in Dallas. He can be reached at jfugitt@bellnunnally.com or via the firm’s website – https://www.bellnunnally.com.
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