Pros and Cons to Employment Arbitration Agreements

Hey everyone, it’s Paul Simon with the law firm of Simon Paschal. We’re here with another video tip of the week. In today’s tip, we’re going to talk about arbitration agreements and specifically arbitration agreements in the employment context. So let’s kind of go through some pros, cons, and then our alternative suggestion for employers who like the arbitration but may want to, after watching this video, modify it slightly. So let’s go through some of those pros.

One of the pros of an arbitration agreement is you can significantly limit discovery. And the way you do this in your arbitration agreement, you spell out what the rules are, whether or not you’re only going to allow a certain amount of depositions, if you’re going to allow interrogatories at all. And then whether or not the document production was limited in any sort of set. So generally in federal and state law, you have a certain amount of the preset depositions, interrogatories, et cetera, and you can limit those in the arbitration agreement.

Now the one caveat there is the other side can argue that it’s not reasonable. And so the arbiter can take a look and say, “Yes, that’s not reasonable in this case forever. And so we’re going to expand the amount of discovery allowed.” Another pro would be, it can be more private. I think that’s one of the big reasons why employers go with an arbitration agreement. And the reason for that is it’s a private filing versus a general lawsuit which was filed in a public court and can be accessed by anyone. In an arbitration, it’s a private matter, so generally no one else is aware that the arbitration’s happening, or more importantly, what the results of the arbitration is. Another pro is that it can also potentially limit kind of what’s known as your runaway jury. Oftentimes an arbiter is a private lawyer who isn’t going to get emotional about the facts and therefore you never have these massive runaway juries where one side believes that the jury just got it wrong. So that’s a pro of an arbitration agreement.

And the last one is that can be more efficient. Generally with an arbitration, you’re able to get out of the calendar of the arbiter much sooner versus a state or federal court where it can take a year or two go to trial. So it can be much more efficient, which can also make it less costly.

So let’s talk about those cons. Some of it we talked about it being private as a pro, it actually may not be as private as you want. What often happens is the employee will file their lawsuit in state or federal court and then you as the employer has to notify the court, “Hey, we have an arbitration agreement, please take this out of your court.” And the court will do that. But the problem is that original filing, which may have all these allegations and assertions against you is a public record and will not be removed. So now you’ve lost that privateness. The other one is I think arbitration agreements have actually gotten much more costly than going through traditional state or federal court. And the reason for that is arbiters are private lawyers, like I said. Oftentimes retired judges who require just an extremely high amount of hourly pay and generally those arbiters require upfront so you may be looking at a 10 to $20,000 check you have to cut before you can actually get to the merits of the matter. So that’s something that I think you’ve got to really keep in mind, especially as a small employer.

The last one is arbiter’s generally are known to split the baby. And what that means is because they’re private, because they’re trying to get your business, they don’t want one side to go away too unhappy. So oftentimes you’ll get these verdicts that give the plaintiff some money. Not as much as they would have gotten if they had gone to court, but they also won’t necessarily poor them out. So that’s something to keep in mind.

So what’s an alternative if you want some of those pros in the arbitration, but you worry a little bit about the cons. Well, one of the alternatives is in your employment agreement to do a jury waiver. And what that’s going to be is you specifically spell out that both parties are waiving the right to a jury. Generally this needs to be bold print so it’s very obvious. We recommend that you have the employee initial right near that jury waiver paragraph so that there can be no sort of, “I wasn’t aware that I was waiving my right to a jury.” Now what that’s going to do is that’s going to get you back to that pro of we’re going to limit a runaway jury because again, a judge is generally not going to be as emotional and so they’re going to rule just on the facts and give a much more reasonable verdict to the extent that the plaintiff does prevail.

And also when you go to court, you can ask the court to enter protective orders and this is going to give it that some of that privacy you can require confidentiality of all the documents, of depositions, et cetera. And you can really limit what the public’s going to be exposed to in terms of what they’re aware of.

The other last tip that we often recommend our employers do is to add a mandatory mediation agreement in their employment agreement. And what this will do is this is going to make stuff more efficient because hopefully you can get your dispute resolved prior to going to arbitration or having the employee file a lawsuit, which you know again, is going to then be much more costly so you won’t be blindsided by just a lawsuit coming out of the woodwork. This is going to require the employee notify you, “Hey, I’ve got this dispute, I’m doing the mandatory mediation.” And you, too, can go and hopefully get this resolved. So that’s our tip for the week. Tune in next week.


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