Arbitration has been around as a viable alternative to the courthouse since Congress passed the Federal Arbitration Act (FAA) in 1925, but it really took off, especially for employment disputes, with the US Supreme Court's decision in Gilmer v. Interstate/Johnson Lane Corp (1991). The Supreme Court's decision upheld the arbitration of age discrimination claims and endorsed some of the characteristics of arbitration, such as limited discovery and less formal proceedings.
Over the next 20 years, the courts developed boundaries for fairness and due process to protect an employee’s statutory rights within the arbitral forum, and eventually arbitration became a more accepted forum for single-plaintiff employment claims.
However, complications arose with the introduction of the class action waiver, when employers sought to prohibit collective and class action lawsuits through arbitration agreements. Since that development there have been an unusually large number of Supreme Court cases involving arbitration and the scope of the FAA.
Below are ten current issues and concerns for employers surrounding the use of arbitration to resolve employment disputes.
1. Arbitration Can Be More Expensive Than Expected
In its early days, arbitration was rightfully touted as a less expensive way to bring unresolved employment disputes to a prompt hearing on the merits. Today, however, many employers are shocked by the expense of the process, finding it comparable to those fees and costs associated with traditional litigation.
But the key is to compare the costs of litigation and arbitration holistically rather than simply on a case-by-case basis. Some options for decreasing costs include using alternative agencies to administer the proceedings, using a defense strategy to get to the hearing as quickly as possible with minimal discovery, and weighing the risks of proceeding via arbitration compared with those of moving forward with litigation.
2. Mass Arbitrations Present Risks and Challenges
A mass arbitration occurs when a plaintiffs’ attorney simultaneously files multiple individual arbitrations against an employer alleging the same claims; this process can place burdens on an employer by, among other things, requiring it to pay arbitration fees for multiple cases at the same time.
Some strategies for avoiding these potential difficulties are to include special mass arbitration procedures within your agreement that provide a framework for settlement, if appropriate; have claimants pay at least part of the filing fee (to the extent consistent with unconscionability law); and, use an arbitration provider that has mass arbitration protocols in place with separate fee schedules and rules.
3. Changes Related to Sexual Harassment and Sexual Assault Claims
Mandatory, pre-dispute arbitration agreements should no longer cover sexual harassment and sexual assault claims. However, parties can still agree after a dispute arises to arbitrate such claims.
4. Pay Careful Attention to Employee Signatures
In order to compel arbitration and obtain dismissal of any lawsuits, the employer must prove it made a valid offer of a contract to the employee, and the employee accepted. In some jurisdictions, assent-by-working is enforceable as evidence of acceptance, but the “gold standard” for manifesting assent by the employee is via signature.
Electronic signatures are acceptable, and that process can be completed online; however, the employer will have an extra burden to authenticate the online signature. So, although it is not necessary to obtain a wet signature, it remains the best evidence of acceptance by the employee.
5. Options for Employer Actions Without Employee Signature
If an employee does not sign the arbitration agreement, whether intentionally or due to indifference, employers may consider a backup option, such as including an assent-by-working provision in the agreement. It is not, however, best practice to terminate those employees who do not sign the agreement, as such action may present a risk of retaliation claims or employee relations issues that may be difficult to resolve.
6. Mandatory Mediation Considerations
Employers may want to include a mandatory mediation provision in an arbitration agreement, requiring that the employee/claimant meet and try to resolve claims in mediation before being able to file an arbitration claim; however, such a provision binds an employer to going to mediation (and presumably making a settlement offer) in every case.
Another option is to include a non-mandatory provision allowing either party to opt out of mediation; the drawback here is that courts will not generally enforce such a provision in the same way as a mandatory arbitration provision. If in particular cases an employer wants to attempt to mediate a claim before arbitration, there are usually avenues to allow it to do so, whether during the Equal Employment Opportunity Commission’s administrative processes or by asking for the opportunity, which claimants rarely refuse.
7. Agency Administration and Assistance with Selection of the Arbitrator
An employer should consider ensuring that whatever provider or process it uses for selecting arbitrators and administering arbitrations is fair to the employee and properly operates as an ADR neutral provider/process, without conflicts of interest.
Otherwise, the arbitration agreement is at risk of being voided for unconscionability. Although some employers choose to use no administrator at all, the most common approach among employers is the use of an administrator such as the American Arbitration Association (AAA), JAMS, CPR, NAM, or other more regional administrators.
8. Potential Issues With Complete Confidentiality
Employers have often added specific terms in the agreement requiring nondisclosure of the filing of the claims, the evidence and testimony, the arbitrator’s award, and any settlement negotiations. These confidentiality provisions are frequently challenged as preventing claimants and employees from the right to communicate and gather information about employment claims.
And the risks of including a confidentiality provision in the arbitration agreement are not only the damages associated with an unfair labor practice, but also the potential loss of other valuable terms, such as the class action waiver, if the entire agreement is considered unenforceable.
For those reasons, and until the National Labor Relations Board (NLRB) further explains what an employer may lawfully require to be confidential about arbitration proceedings, it is best practice to consider removing any confidentiality terms from the arbitration agreement, relying on the arbitrator on a case-by-case basis, and considering the procedural rules of the administering agency.
9. California-Specific Conundrums
California rules and regulations can present unique challenges for employers with arbitration agreements. With shifting court decisions and ever-evolving state laws, employers may struggle to keep up with these ongoing developments.
California employers may be able to use properly-drafted arbitration agreements to limit liability for representative claims, at least for now. Indeed, many employers are modifying their agreements to make explicitly clear that individual Private Attorneys General Act (PAGA) claims must be arbitrated, and PAGA claims based on harms suffered by other employees are excluded from arbitration.
10. Class Action Waivers
The costs of arbitration continue to rise. So, are the benefits in the current landscape worth the costs? The answer will likely be yes, particularly as a risk management tool for class and collective actions in employee-friendly jurisdictions.
Many employers are still considering the adoption of arbitration agreements, and those employers who have adopted, and who are measuring the costs regularly, have elected to keep the agreements (and the class action waivers) in place.
Conclusion
As a result of the ever-increasing complexity of the necessary terms to be included in these agreements and continued challenges to their use, it is important for employers to consider these top ten issues on all things ADR and arbitration related to employment agreements.
Keeping these issues in mind can help employers best adapt the contents of their arbitration programs and understand and plan strategically for new legal developments.
Authors: John G. Harrison, Christopher C. Murray, and Jack S. Sholkoff (Ogletree Deakins)
