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Working Around the Courtroom: Is Arbitration for You?

Employment Law Update

September 8, 2016

Editor note: Kathleen Bradshaw Burchette authored this piece prior to the settlement announced on September 6th. The Washington Post reports that it is the "largest known, single-plaintiff, pre-trial settlement for sexual harassment charges."  More about the settlement, including insights that Katie shared with BizWomen, a publication of The Business Journals.

Within hours of Gretchen Carlson suing then-Fox News CEO Roger Ailes for sexual harassment, Ailes’ attorney responded that Carlson was “desperately attempting to litigate [her termination] in the press.”  It didn’t take much longer for Ailes to follow this comment with a formal motion to thwart Carlson’s supposed dreams of a public trial; two days after Carlson instituted her lawsuit, Ailes filed a motion to compel arbitration of the claims pursuant to an arbitration provision contained in Carlson’s employment agreement with Fox News.

Although the case has recently settled for a reported $20 million, Ailes’ maneuver prompted public discussion about arbitration agreements.  Can an employer really require a prospective employee to agree to arbitrate any future claims as a condition of employment?  Why would arbitrating employment claims be preferable to litigating them in court?  What are the risks and expenses associated with arbitration?

Validity of Arbitration Agreements

As a preliminary matter, the U.S. Supreme Court has determined that an employer can require a prospective employee to sign on for arbitration of future claims as a condition of employment. In a later opinion, American Express Co. v. Italian Colors Restaurant, the court determined that class action waivers in arbitration agreements are generally enforceable.  If applied in the context of, for example, wage-and-hour disputes – where the cost to arbitrate often exceeds the amount of potential individual recovery – such a determination could have a significant impact on an employee’s practical ability to bring a claim against her employer.

However, the American Express opinion did not involve an employment agreement.  Indeed, federal appellate courts throughout the nation have differed in their views of whether these class action waivers are enforceable in employment arbitration provisions.  In May of this year, the Seventh Court of Appeals held that these waivers are unenforceable because they interfere with an employee’s ability to engage in protected concerted activity, a right protected under the National Labor Relations Act.  On Aug. 22, 2016, the Ninth Circuit Court of Appeals followed suit, echoing the Seventh Circuit’s holding that clauses mandating individual arbitration waive an employee’s substantial federal right and are therefore unenforceable.  For employers in Arizona, California, Idaho, Illinois, Indiana, Montana, Nevada, Oregon, Washington, and Wisconsin, this means that class and collective action waivers are out.

However, the fate of class action waivers in the employment context is different in other parts of the United States.  The Second Circuit, Fifth Circuit, and Eighth Circuit appellate courts have given employers in several states the green light to require individual arbitration of an employee’s claims.[1]

The law is not yet settled on whether these waivers are enforceable in the Carolinas, although lower court and state court decisions in both North and South Carolina are trending toward finding the waivers enforceable.

Benefits of Arbitration Agreements

In any case, employers nationwide have elected to require their employees to agree to some form of arbitration, with or without class action waivers.  Employers find arbitration appealing for a myriad of reasons, including:

  • Arbitration permits the parties to choose who will decide the dispute, allowing for selection of an arbitrator (or arbitrators) with expertise in employment law.
  • Arbitration is confidential – there are no public records, the hearings are private, and for high-profile cases like Carlson’s, media outlets do not have access to the proceedings or the results. In employment cases, where the facts are often particularly inflammatory, confidentiality is a meaningful perk for many employers.
  • The proceedings are more informal. Arbitrators are generally better able to accommodate parties’ and counsel’s schedules, and hearings are held in conference rooms rather than courtrooms. This generally creates a lower-stress atmosphere for dispute resolution.
  • Arbitrations do not have juries. Whether or not you believe that juries are generally more employee-friendly than arbitrators, it is certainly easier to predict how one individual – as opposed to 12 – will evaluate the case and assess the award.
  • Arbitration decisions and awards are final, binding on the parties, and typically hard to appeal.
  • Arbitrators can limit discovery, which in some instances limits costs and permits a matter to proceed more efficiently, leading to a more expedient resolution.

 Risks of Arbitration Agreements

This is not to say that arbitration is without its downside.  Here are a few things to consider before implementing an arbitration agreement:

  • As noted above, arbitration decisions are difficult to appeal – meaning that an employer is stuck with the outcome, like it or not.
  • The same limited discovery that allows for quicker resolution can sometimes come back to bite employers. This can restrict an employer from learning more about the strengths and weaknesses of the employee’s case before the matter proceeds to hearing.
  • Although they do not usually exceed the cost of litigation, arbitrator fees can be substantial and are generally the employer’s responsibility.
  • Emergency injunctive relief is not typically available in arbitration. If an employer discovers that a former employee is misappropriating trade secrets or violating his or her non-competition agreement, the employer will likely wish to prevent or enjoin this conduct as soon as possible.  While employers can pursue this course in litigation, such a remedy is not generally available in arbitrations.
  • Although empirical evidence on this point is lacking, arbitration critics assert that arbitrators have a tendency to “split the baby” in issuing awards, rather than make no award or a full award. Where an employer’s case is comparatively strong, this would, of course, be a disadvantage.

Conclusions for Employers

In sum, the most important thing for employers to consider in weighing whether to include arbitration provisions in employment agreements is how these – and many other – factors affect them individually.  If you decide that arbitration is for you, speak with experienced counsel about the scope and likelihood of enforceability of a mandatory employment arbitration provision and/or a class or collective action waiver.

[1] The Fifth and Eighth Circuits are comprised of Arkansas, Connecticut, Iowa, Louisiana, Minnesota, Mississippi, Missouri, Nebraska, New York, North Dakota, Texas, South Dakota, and Vermont.