The law is clear that employers and employees may agree to resolve employment-related disputes through an arbitrator, rather than in the courts.  The agreement details the process, such as which disputes are subject to arbitration, how to select the arbitrator, what rules will apply, and more. The enforcement of arbitration agreements has been the subject of considerable litigation during the past two decades, creating some uncertainty about arbitration’s feasibility and benefits. Employers may ask whether compulsory employment arbitration is a good idea in light of these developments. There are pros and cons that employers should weigh.

Arbitration provides several benefits for employers.  First, the arbitration process generally is faster than litigation, particularly in those jurisdictions where courts are backlogged.  Many procedures may be streamlined, such as resolving discovery disputes with a telephone call or letter rather than a noticed motion. The agreement and applicable rules may authorize the arbitrator to limit the amount and types of discovery, particularly depositions. Exhibits and other information can be informally exchanged. These efficiencies may lower defense costs and attorney’s fees.

Arbitration is a private process, which decreases the chances of negative publicity and public attendance at a trial. The arbitrator as fact finder eliminates the unpredictable, often emotional decisions of a jury.  Unlike court proceedings, the arbitrator and parties can schedule events and the arbitration hearing itself for mutually convenient times. Arbitration is typically binding, generally precluding or severely limiting appeals and most post-arbitration proceedings. 

The U.S. Supreme Court recently confirmed a major benefit for employers considering arbitration agreements.  In Epic Systems Corporation v. Lewis, the Court held that class action waivers may be lawfully included in arbitration agreements. Put simply, an arbitration agreement with class action waiver limits the employee (1) to pursuing covered claims exclusively in arbitration and (2) to arbitrating only his or her own, individual claims. As a result, employers with otherwise lawful arbitration agreements may avoid class action litigation entirely. However, employers risk that multiple individuals will pursue identical, individual claims, which can cause disruption and inefficiencies as well.

Arbitration agreements have their drawbacks as well.  The courts, particularly in California, have created a web of procedural safeguards (such as the employer’s having to bear all costs peculiar to arbitration), which that can increase costs and add complexity. Arbitration makes it easier for an employee to bring a claim without a lawyer, or with inexperienced counsel. Along the same lines, there are cases in which a jury might be preferable, such as those in which a jury might not view favorably the type of claim, the plaintiff or counsel.

Arbitrators are concerned about the perception of bias in favor of the paying party (the employer in virtually all cases). As such, they may not grant summary judgment or limit the claimant’s case as a judge might. Additionally, despite arbitration’s private nature, larger arbitration administrators are required to publish on the internet information about each arbitration on a quarterly basis.

Employers should also keep in mind that having an arbitration agreement does not prevent employees from submitting claims to federal agencies, such as the EEOC.  In 2014, the California Supreme Court held that an arbitration agreement does not preclude employees’ pursuit of wage and hour-related penalties under the Private Attorney General Act.  That is because those PAGA actions are brought on behalf of the state, which is not a party to the employment arbitration agreement.

Employers who require employees to sign an arbitration agreement as a condition of employment must ensure the agreement is carefully drafted.  The agreement should broadly identify which claims are covered to avoid the possibility that a claim is excluded. The agreement should specify whether the arbitrator or a court determines if the agreement covers a particular dispute or is otherwise enforceable, as well as what rules apply to the proceedings.  Keep in mind that private arbitration services, such as JAMS and the American Arbitration Association, have several version of rules from which to choose.  The agreement must not limit any statutorily imposed remedies (e.g., attorneys’ fees or punitive damages) or include restrictions that prevent the parties from obtaining “adequate” discovery.  Further, the agreement may not be enforceable if it is drafted in a one-sided manner.  The employer should be subject to any restrictions placed on the employee, and the employee should benefit from any rights or remedies extended to the employer.

Employers should present arbitration agreements to the employee as a standalone document, rather than burying the agreement in an employee handbook, to prevent the employee from arguing that they did not knowingly agree to arbitration.  Additionally, if disseminating the agreement electronically, it is important to have appropriate proof of receipt and, if required, affirmative agreement. The employer should ensure that agreements may be modified to conform to changes in the law that invalidate certain provisions, or require new ones.

Employers also should consider that mandating arbitration potentially may affect employee morale, or even deter qualified employees from accepting a job. Many politicians are openly hostile to arbitration as anti-worker, and may apply pressure on employers mandating arbitration. Employers that likely may pursue litigation against employees, such as for trade secret theft, should understand they, too, will be required to arbitrate such claims.  

Some pending issues could affect the above discussion.  The U.S. Supreme Court will decide in Varela v. Lamps Plus, Inc., if courts should interpret an agreement that does not contain an express class-action waiver as authorizing class arbitration.  In Lawson v. ZB, N.A., the California Supreme Court will decide whether Federal Arbitration Act (“FAA”) compels or preempts arbitration of PAGA claims seeking lost wages as civil penalties under California Labor Code Section 558.  Finally, the California legislature currently is considering AB 3080, a bill that seeks to prohibit employers from requiring employees to enter into an arbitration agreement as a condition of employment.  It would also prohibit retaliation against employees who refuse to consent to waiving their right to file and pursue a civil action in court.

The foregoing is just a summary.  There may be advantages and disadvantages to arbitration that are unique to a particular industry or business. Employers interested in pursuing arbitration should consult with employment counsel familiar with both the employer’s business and with the legal hurdles that must be overcome to enforce mandatory arbitration agreements.

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