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12 June 2019
Pros and cons of arbitration programmes
Interim dispute resolution mechanisms
Record keeping in employment arbitration
Class and collective actions
One year after the Supreme Court's landmark decision in Epic Systems – which paved the way for employers to force employees to waive their right to bring class actions – this article revisits the court's decision and the pros and cons of mandatory arbitration programmes with class action waivers.
On 21 May 2018 a sharply divided Supreme Court upheld the enforceability of employment agreements that bar class actions by mandating individualised arbitration. In a five-to-four decision written by Justice Neil Gorsuch, the court found in favour of the employers in all three of the cases combined for review.
The Supreme Court's majority decision in Epic System holds that the Federal Arbitration Act requires enforcement of arbitration provisions in employment contracts which mandate one-on-one arbitration and that the National Labour Relations Act neither conflicts with nor overrules the Federal Arbitration Act.
As a result of Epic Systems, many employers can now use arbitration agreements to limit employees' ability to pursue class and collective actions. But is this type of arbitration programme right for every US company or even the majority of US companies?
It is generally accepted that arbitration is:
However, despite these general beliefs, depending on the type of dispute and the chosen arbitral forum, arbitration can sometimes be more – or at least equally – time consuming and expensive as litigation. When this is the case, it can negate the advantages that an employer might expect from using arbitration.
Confidentiality and limiting the risk of media attention
That said, one thing is definite: undertaking arbitration rather than conventional litigation significantly increases the chance of a dispute remaining confidential, especially if the parties settle prior to the arbitrator's final determination. Arbitral records are generally not public and the existence of proceedings is generally unknown unless one of the parties seeks to enforce an arbitration award in court.
The private nature of arbitration proceedings means that there is less risk of unwanted media attention – something which clearly benefits employers. Further, establishing an arbitration programme reduces the chance of employees filing copycat claims, which is sometimes seen in traditional litigation.
Arbitration procedures in single employee matters are generally more streamlined than court procedures in similar cases. The dispute resolution process can be tailored to include reasonable discovery limitations, which may be appropriate depending on the type of dispute.
These streamlined procedures typically result in lower outside counsel fees for employment disputes.
Arbitration disputes tend to be resolved quicker than traditional court proceedings. This is largely because courts in many jurisdictions struggle with crowded dockets and competing demands.
Unlike arbitrators, judges must provide criminal defendants with speedy trials. However, civil litigants have no such constitutional right. In jurisdictions such as Texas, the proximity to the southern border means that the federal courts can be backlogged with criminal cases involving drug possession, drug smuggling and immigration proceedings.
Further, one of the unfortunate results of the political gridlock in Washington is that Texas district courts have a substantial number of judicial vacancies. With Texas district courts operating without a full complement of federal judges, it takes significantly longer to try a civil case to verdict.
No excessive verdicts
One of the primary advantages of arbitration identified by employers and defence counsel alike is that, by avoiding juries, defence counsel are more likely to prevail on a claim's merits. Similarly, if an employer is found to be in violation of an employment statute, arbitration will enable the employer to avoid the risk of the jury reaching an excessive verdict.
This is because it is generally believed that a single arbitrator or panels of arbitrators is less likely to be swayed by sympathy or other non-legal factors in making a liability decision, in determining non-economic remedies, and in setting the amount of compensatory and punitive damages to be awarded. Because arbitrators are perceived as less alterable, arbitration disputes tend to settle more cheaply. By removing the risk of an excessive or runaway jury verdict, the whole settlement calculation changes. Employees and their lawyers can no longer base their negotiations on the hopes that they will successfully survive a motion for summary judgment and be able to present their case to a sympathetic jury which will give them an excessive verdict.
Right to appeal and fairness
The final advantage of arbitration is that, if the employer wins, the opposing parties' opportunity to appeal is highly limited. This is further discussed below – particularly how this can also be seen as a con.
Notably, whatever arbitration programme an employer chooses, the programme and the agreements must be fair to employees in order to be enforceable.
Arbitration costs and arbitrator fees
One way in which an employee or their lawyer can attempt to avoid an arbitration agreement is to immediately establish that the agreement is unconscionable under state law. Unconscionability can be either:
Substantive unconscionability is more likely to exist where an arbitration agreement's terms make it difficult for an employee to bring their claim. To avoid this result, employers typically design their arbitration programmes so as to require that they pay a greater share of arbitration costs and arbitrator fees.
Regardless of whether an employer chooses the American Arbitration Association (AAA) or another well-known arbitral forum, arbitration fees are typically much higher than court fees. If the cost for an employee to commence an arbitration is set higher than the cost for that employee to commence a court case, this could void the arbitration agreement and result in unwanted court proceedings.
Another downside to arbitration programmes is that they make it easier for employees not represented by counsel to bring weak claims. Arbitration programmes can unintentionally turn any dispute, including matters that would probably not get filed in court, into a serious issue that must be resolved by an arbitrator.
Absent an agreement to arbitrate, such nuisance claims may disappear after a position statement has successfully been filed with the Equal Employment Opportunity Commission (EEOC) or another administrative agency. However, with arbitration programmes, if an employee has not been represented but still has a right to sue letter, it will be easier for them to file a claim in arbitration than in state or federal court. If the employee demands arbitration, the employer will be compelled to honour this demand and proceed to arbitration.
Notably, Epic Systems does not stop individuals from approaching the EEOC or another agency. Further, even if an employee settles their claims with their employer, they can still bring a claim to the EEOC, although at that point they cannot collect monetary damages.
When developing employment arbitration programmes, an employer cannot limit employees' substantive rights. In particular, employers cannot limit the statutory remedies that would be available in a court. As such, if punitive damages are available for a particular claim, they must also be available if that claim is made in arbitration. Otherwise, the employee's due process rights will not have been protected and the arbitration agreement will likely be deemed void and court litigation necessary.
With respect to discovery in arbitration, as mentioned above, the process is generally streamlined and discovery may be somewhat limited. However, employees must still maintain the right to conduct sufficient discovery in order to establish their claim. If the discovery restrictions are too one-sided, the arbitration agreement may be found unconscionable.
On the other hand, arbitrators have some discretion to order whatever discovery they deem necessary to avoid what could otherwise be an unconscionable arbitration agreement. This may negatively affect how much discovery will take place and may lead to increased costs. If this happens, the employer's cost savings will likely be mitigated.
Further, what constitutes reasonable discovery may depend on the type of case, the facts involved, and the forum used. For example, the AAA rules give arbitrators tremendous discretion in tailoring what discovery may be needed in a particular case.
Motions to dismiss and summary judgment motions
In many instances, depending on the arbitration forum and the arbitrator selected, it may be next to impossible for an employer to prevail either on a pre-discovery motion to dismiss or a pre-hearing motion for summary judgment. In a typical court case, the parties can bring a motion to dismiss or motions for summary judgment and the court will generally rule on those issues before trial. This allows the parties to have legally insufficient or improper claims completely dismissed or limited so that there are fewer claims to defend and fewer witnesses to hear during the trial. While it is often possible to make motions to dismiss and for summary judgment in the context of an arbitration proceeding, those dispositive motions generally have a much lower chance of succeeding in an arbitration forum (arbitrators are, after all, typically paid based on the number of hours or days they work on the case).
If an employer cannot obtain early dismissal of some or all of the claims, a more complex arbitration hearing may be required, during which the employer must present witnesses and argue and present evidence on claims that may not have much merit.
While it is generally understood that arbitrators are unlikely to precisely split the difference between the parties and are unafraid to make rulings based on the evidence as they see it, some employers believe that arbitrators avoid making tough legal decisions and instead offer concessions to both parties which often results in all of the parties being displeased. Concern in this regard has led some employers to decide against implementing arbitration programmes.
Appeal and trial rights
As discussed above, appeal rights are limited once an arbitration has been lost. This is both a pro and con. Absent an agreement providing a right to appeal, the parties in an arbitration generally may contest a decision only if they believe that fraud took place during the process or the arbitrator manifestly disregarded the applicable law or rules.
Employers can address this limitation by developing and implementing an arbitration programme that allows initial arbitral awards to be appealed, perhaps from a single arbitrator to a panel of arbitrators. However, this will incur extra expenses and require more time; a clear downside if a central goal of the arbitration programme is to reduce expenses and time spent on the dispute.
Negative employee and public perception
The final concern of establishing an arbitration programme is that employees or the public may view the decision negatively, as it removes employees' opportunity to have their claim heard by a jury in a public forum.
Once an employer decides to implement an arbitration programme, there are numerous ways in which they can tailor the programme to meet their needs and – critically for the viability of the programme – ensure that it is fair to employees.
An important initial consideration is whether to include one or more formal interim dispute resolution mechanisms (eg, a mandatory negotiating period, confidential peer review, or mandatory mediation) in the programme.
Depending on the number of employees the employer has, their demographics and the employer's corporate culture, interim mechanisms can help to stop claims before they escalate and incur more burdensome costs at arbitration.
An example of mandatory negotiations would be to require a fixed period (often around 14 days) during which the parties must negotiate in good faith, directly or through representatives, before any claim can be filed. This cooling-off period can frequently eliminate potential claims at their earliest stages.
To use peer review as an interim mechanism, an employer will typically establish a panel of three to five of the employee's co-workers to listen to the potential claim on a confidential basis and make a non-binding recommendation to the employer and the employee for resolution. Notably, peer review panels are more appropriate for larger companies with multiple locations to better preserve confidentiality and privacy and limit the risk of the claimant interacting with panel members on the job.
In smaller companies, this approach is generally less feasible. However, this mechanism – which gives employees a chance to air their grievances before co-workers who understand the specific work environment – is highly successful at limiting claims in large companies.
Mandatory mediation is another interim resolution mechanism that can control claims. Under this mechanism, a neutral arbitrator must conduct mediation before the dispute can be filed as an arbitration claim. The neutral arbitrator will typically be a trained jurist from a popular dispute resolution organisation, such as the AAA Judicate West, or the International Institute for Conflict Prevention and Resolution. Further, they are typically former judges with decades of experience resolving cases.
Where this mechanism is used, each party will put forward their case and the mediator will objectively explain the pros and cons of their respective positions in order to reach a settlement or issue a non-binding recommendation for settlement.
Picking the right mediator is critical to success. For example, sometimes a non-judge with specific industry experience will be preferable to an otherwise experienced judge who has limited knowledge of the industry.
Interim dispute resolution mechanisms cost money and require time and resources. For some companies, these requirements will be prohibitive and a simple arbitration mechanism will be preferable. For others, adding one mechanism may be appropriate. Further still, others may wish to layer their dispute resolution process with multiple mechanisms.
All interim resolution mechanisms must be memorialised in an agreement that will culminate in the arbitration of claims. This agreement must detail all of the requirements to bring a claim under the arbitration programme. As an initial prerequisite, the programme should require employees to file tailored preliminary forms about the claim. These forms will help to flesh out details to ensure that the precise nature and scope of the claim, as well as any redress sought by the employee, is clear before arbitration begins.
A number of considerations and forms of arbitration can be employed in order to memorialise the terms and conditions of the arbitration proceeding itself. Again, these must be made with an eye to fairness – in particular, the appearance of fairness to employees.
Fairness to employees is critical because the courts are more likely to suppress a challenge to the enforceability of an arbitration programme if certain cornerstones of fairness are built in.
Costs and recovery
A prime example of this fairness requirement is costs. Typically, as long as an employee is not burdened with higher costs than those which would apply if they were to bring the claim in court, the cost of the arbitration programme will be viewed as fair. In light of this, many employers pay the full costs of the programme to remove any obstacles for employees. That said, some employers want employees to be invested in arbitration and will thus include an initial filing or processing fee in the programme.
Further, employees must be able to recover whatever could be recovered in court.
Seat of arbitration and other location considerations
Employers must also consider the seat of arbitration where the hearing will be physically held. Forcing an employee or their witnesses to travel a significant distance could be deemed unfair and affect the enforceability of the agreement. Of course, choice-of-forum provisions and contracts at the heart of the dispute will have a bearing on this issue.
If the arbitration is international, there are additional considerations regarding location. Many foreign countries and international organisations have arbitral institutions and frameworks (eg, the Coalition to Transform Advanced Care in China or even the United Nations Commission on International Trade Law for international trade law) to assist parties with the appointment of arbitrators or other administrative issues. However, for those that do not, parties must create their arbitral forum and administrate on an ad hoc basis. In those cases, local experts are indispensable.
In relation to this, the language used during arbitration proceedings is a critical factor when ensuring fairness for employees because of their need to understand the proceeding. With that in mind, the cost of any translator must be factored in.
Number of arbitrators
The number of arbitrators is also an important consideration. Typically, there will be one arbitrator or three arbitrators depending on the cost and complexity of the claim. The process for selecting the arbitrator(s) or panel must be spelled out in the agreement.
Neutrality is also a new hot-button issue. Some arbitration organisations are going to great lengths to ensure that arbitrators do not know which of the parties favoured their appointment during the selection process. Further, depending on the seat of arbitration, the arbitrator's travel costs may need to be addressed in the agreement.
Obviously, the law governing the arbitration is a key consideration, and any choice-of-law and conflict of law provisions in the underlying agreements in dispute will have a bearing on that issue.
Confidentiality is a significant benefit of using arbitration. However, it is important to remember that arbitration proceedings and agreements are not automatically confidential. Confidentiality must be clearly spelled out in the agreement. Further, confidentiality can be applied to different components of the arbitration (eg, the proceedings, the arbitral award or other aspects of the arbitration, including discovery). In short, decisions to tailor confidentiality to balance fairness and the employer's goals are critical.
Rules of evidence
Other considerations include contracting for applicable rules of evidence and the form and limitation of document discovery and depositions. As long as the agreement contains the touchstones of fairness, the agreement will be deemed fair to the employee and arbitration can be used rather than litigation.
Form of awards
The form of awards is an important consideration, regardless of whether the employer wants:
This consideration also directly relates to potential appeals that can be built into the agreements . Obviously, any information underlying the ruling will inform future appeals.
It is critical to determine when and how to present arbitration agreements for execution and how to collect those agreements. Employers can do this as part of a training programme in conjunction with making changes to their handbook or introducing new policies. Alternatively, employers can choose to conduct one-to-one meetings between HR and individual employees, depending on the size of the company.
All too often, an employer with a strong arbitration programme and a system for disseminating and signing agreements cannot find the signed agreements at the crucial moment. Even if an employer has sign-in sheets and other signed forms from the employee, it is imperative to have the signed arbitration agreement. Further, managers who may be training or interfacing with employees about signatures must receive their own training to ensure that they file the paperwork correctly. This can save a lot of money on a motion to compel arbitration.
Employers can use digital or e-signatures. This can eliminate a lot of the problems listed above, assuming that the system works well. However, there have been earlier cases where judges were unfamiliar with and unconvinced that e-signatures served as sufficient proof that the employee was the only one who could have signed the agreement.
Again, this largely depends on the audience. While systems have certainly been streamlined, it is always worth understanding exactly how e-signatures will be admissible when dealing with a challenge.
Last but not least, the limitation of class and collective actions must be considered in the wake of Epic Systems. Employers must factor in multiple considerations if they wish to limit class and collective actions. Often, such restrictions are put into practice by requiring employees to bring all claims under an arbitration agreement only as an individual. Employers have also been known to use supplemental language that clarifies that even if a claim is initially brought, filed and put forward as a class or collective action, the employer will arbitrate claims only individually. However, this raises other issues.
For example, having an Epic Systems-type provision in an arbitration agreement concerning class and collective actions may result in a flood of individual claims from the same attorney or on the same issue. As such, employers should consider provisions to avoid repeat document requests, re-deposition of the same witnesses and other discovery limitations.
Notably, a careful balance must be struck between the employer's economic concerns and the employee's right to fairness.
In the wake of Epic Systems, if one of the goals of the arbitration programme is to eliminate the risk of collective and class action claims, it is imperative not to leave an agreement silent with respect to those issues. Otherwise, the courts will have to consider whether an employee can move forward with a class or collective action claim in the absence of clear language in this regard.
Following Epic Systems, an explicit provision is the most obvious way in which an employer can impose restrictions regarding class and collective actions.
Epic Systems has presented employers with a unique opportunity to institute an arbitration programme or tweak their existing programmes. While Epic Systems is clearly a business-friendly decision, it is worth emphasising that employers considering adopting an employee arbitration programme should consult with experienced employment counsel before doing so. As set forth above, there are many factors for a company to consider, including the culture and reputation of the organisation.
For further information on this topic please contact Stuart Blaugrund at Dentons' Dallas office by telephone (+1 214 259 0900) or email (firstname.lastname@example.org). Alternatively, contact Brian S Cousin or Richard I Scharlat at Dentons' New York office by telephone (+1 212 768 6700) or email (email@example.com or firstname.lastname@example.org). The Dentons website can be accessed at www.dentons.com.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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