Pros and Cons of Employee Arbitration Agreements – A Practical Discussion

by Spilman Thomas & Battle, PLLC

[author: Peter R. Rich]

Agreements to compel the resolution of most employment related disputes are enforceable under the Federal Arbitration Act (FAA).  The courts, including the United States Supreme Court, have mandated the enforcement of arbitration agreements in employment cases under the FAA provided the agreements are fair, provide due process, and enable employees to preserve all the rights and remedies that they would have been entitled to in a court of law. See Circuit City Stores Inc. v. Adams, 532 U.S. 105 (2001); Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 35(1991) (age discrimination claims); State ex rel. Clites v. Clawges, 685 S.E.2d 693 (W.Va. 2009)(sex discrimination and retaliatory discharge claims). However, an employer’s decision to require arbitration of disputes as a condition of employment requires consideration of more than whether the agreement itself is likely to be upheld and that decision may well not be the same in all circumstances. Some of the relevant factors are discussed below.

Certain fundamental differences between the courtroom and arbitral forum tend to favor arbitration. There is no jury in arbitration. Instead, the dispute will be decided by a neutral arbitrator jointly selected by the parties in accordance with the procedures described in the arbitration agreement. Many such agreements adopt the selection procedures provided by a specific arbitration service such as the American Arbitration Association (AAA) which generally involves the selection of an arbitrator from a panel provided by the AAA. Of course, the absence of a jury does not mean the employer will prevail, but juries are unpredictable and bring personal experiences, including biases, to the decision-making process that may affect the ultimate outcome. These same risks exist to a lesser degree when using a private arbitrator but can be mitigated by a thorough pre-selection investigation of the arbitration panel. Other benefits associated with the arbitration alternative include that the arbitration process is typically private, more predictable and efficient in that the parties generally have discretion to agree on the schedule, including discovery and hearings, and technical evidentiary and procedural rules are less prevalent. The costs of arbitration may also be far less than those associated with litigating through the court system.

There are downsides to arbitration as well. First, such agreements work both ways. An employer that insists upon arbitration surrenders the right to remove employee claims that are federal in nature (Title VII, ADEA, Fair Labor Standards Act) to the federal district courts, many of which are friendlier to employers than state courts. Second, the bases for appeal of an adverse arbitration decision, if not limited by agreement itself, are severely limited under the FAA. Arbitration decisions may generally only be vacated under the FAA where they are tainted by corruption, fraud, arbitral misconduct, or where the arbitrator’s actions were such that a “final and definite award upon the subject matter was not made.” 9 U.S.C. Section 10(a). As the Supreme Court has stated, “Courts . . . do not sit to hear claims of factual or legal error by an arbitrator. . . .” United Paperworkers Int'l Union v. Misco, Inc., 484 U.S. 29, 37-38 (1987). Thus, an arbitrator’s decision is likely to be final even if the arbitrator erred in applying the law or in determining the facts.

Other potential downsides to arbitration include the informality of the process; there is often no dispositive motion practice or mandatory mediation. The result is that most arbitration proceedings end in an evidentiary hearing (with the associated costs) rather than a dismissal or settlement. The opportunities for examining potential witnesses through pre-hearing depositions may be more limited than provided in the court system. Moreover, as arbitration and other forms of alternative dispute resolution have become more common, we have observed that an increasing number of those holding themselves out to be arbitrators lack a résumé of published decisions for the parties to review. Consequently, the selection process is critical and your agreements should typically establish qualifications for arbitrations such as membership in the National Academy of Arbitrators.

Finally, the mere fact that an employer insists on arbitration agreements for employment disputes does not mean that employees will not challenge their enforceability in court and thus cut into the perceived benefits of less cost and expeditious resolution typically thought to exist with such agreements. At their essence, arbitration agreements are legal contracts, and thus, despite being generally enforceable under the FAA, they remain subject to challenge under general principles of state contract law and equity, such as the absence of consideration, ambiguity and unconscionability. See State of West Virginia ex rel. Richmond American Homes v. Sanders, 228 W.Va. 125 (W. Va. 2011). Thus, counsel representing employees may, as a matter of strategy or in order to increase settlement leverage, threaten to or actually challenge the enforceability of such agreements in court. The result is that an arbitration provision may only result in an added layer of expense as the parties fight over the actual arbitrability of the dispute before starting on the merits

In summary, there is no “right” or “one-size-fits-all” answer to this question as there are factors that militate in favor of and against requiring the use of arbitration to resolve employment-related disputes. Arbitration agreements are also not a panacea that will cure more fundamental problems with an employer’s human resources practices. They can, however, be useful in many jurisdictions if the employer is willing to put the effort in the front end to find a good arbitrator and is willing to take each dispute to a final hearing.

For more information, please contact:

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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