Arbitration Provisions in Employment Agreements: The Pros and Cons
When it comes to arbitration provisions in employment agreements, one size does not fit all. Arbitration has significant advantages and disadvantages. Deciding whether to include an arbitration provision in an employment agreement requires thorough consideration based upon an employer’s individual circumstances.
Pro: Class-Action Waivers. The biggest potential advantage of arbitration is that employers can require employees to arbitrate solely on an individual basis by including a provision that the employee waives his or her right to bring class or collective actions. Such waivers can protect employers from the increased expense and potential liabilities involved in defending claims encompassing multiple employees. In Florida, courts have generally upheld properly drafted collective and class action waivers in arbitration agreements. However, such waivers must be carefully crafted to be enforced.
To avoid the enforcement of class action waivers, employees have recently tried arguing that arbitration agreements containing such waivers violate the National Labor Relations Act by preventing employees from engaging in protected concerted activity. This argument has succeeded in some courts and failed in others. The National Labor Relations Board has now requested that the Supreme Court rule on this issue. The law governing class action waivers in arbitration clauses is continuing to evolve rapidly. To ensure that their class-action waivers comport with the most recent decisions on the issue, employers should consult with their employment attorneys before including such a waiver in their employment agreements.
Pro: Potential Time Savings. Arbitration is generally more streamlined and less formal than litigation. Thus, arbitration can be over in a matter of months, whereas litigation can drag on for years.
Pro: Privacy. In litigation, the parties’ filings are public. In arbitration, the parties can agree to keep all proceedings confidential, including the final arbitration award. This privacy is attractive to employers wanting to limit the “pot-stirring” effects of employment litigation on their workforce. However, this privacy is not absolute: when an employee files a class action arbitration demand, for example, the initial filings are often subject to publication even if the arbitration does not ultimately proceed as a class action. Additionally, some individual arbitration awards, such as those dealing with federal wage-and-hour claims, must be filed with and approved by a court or the Department of Labor to be enforceable.
Con: Costs. Although the conventional wisdom is that arbitration is less expensive than litigation, employers frequently find that arbitration costs more. Arbitration expenses include filing and hearing fees, arbitrator compensation and expenses, and attorney’s fees. Some employment arbitration regimes allocate most of these costs to the employer. Additionally, there is no guarantee that an employee will accept arbitration without challenging the arbitration provision itself. Litigation over whether to arbitrate in the first place can drive costs and fees up even more.
Pros or cons? Some features of arbitration may seem like advantages at first, but cut both ways. For example, the losing party in arbitration has very limited options for appeal; for better or for worse, the parties generally must live with an arbitrator’s final decision. Additionally, the formal rules of discovery and evidence are often followed loosely, if at all. On one hand, this can result in significant time and cost savings, because discovery and disputes over discovery and evidence can be extremely time-consuming. On the other hand, these limitations can hamstring a party whose case depends on extensive discovery or whose defense depends on limiting an opponent’s use of questionable evidence.
Whether to include a mandatory arbitration provision is one of many issues that an employer should consider carefully when an employment agreement is being created or revised. You should seek the advice of counsel to assist you in this process. A member of the Employment Law Group at Trenam Law would be happy to help you.