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To Arbitrate or Not, That is the Debate

We recognize that many employers — and likely many readers of this blog — have implemented arbitration programs for addressing disputes with employees by including those provisions in employment agreements or in their employee handbook. But, for those employers who have not done so and may be considering implementing such a program, we thought it might be helpful to highlight some of the considerations relevant to making that decision.

First, the advantages. Arbitration programs offer employers a process to avoid lawsuits in favor of a private and often quicker dispute resolution process. Unlike the court system, arbitration hearings are private and arbitration awards may be confidential (though the enforceability of such a provision can vary). Arbitrations also generally proceed at a faster pace than lawsuits because the parties are not competing with other litigants for time before the judge. Although arbitrators are often busy, an arbitrator can provide a date certain for the hearing on the merits while courts rarely offer that assurance. Additionally, arbitration gives the parties greater control over who will decide the case, with both parties being able to rank or strike potential arbitrators from a list. Importantly, since there is no jury, there can be no so-called runaway jury verdict and the experience and perspective characteristic of most arbitrators may reduce the risk of an excessive damage award. As we recently highlighted in another post, employers can eliminate the possibility of being sued in a class or collective action through the use of a properly drafted waiver.

Despite these advantages, there are notable countervailing considerations. First, as a practical matter, an adverse decision cannot be appealed. Arbitration decisions are reviewable, but only on narrow grounds that are unrelated to the merits of the decision. Second, arbitrators, like all litigators, come with their own set of experiences and biases and there is no guarantee that the employer will be happy with the chosen arbitrator. Indeed, as arbitration has become widespread, the panels of prospective arbitrators have become quite diverse. And, although arbitration is thought of as being cheaper, this is not true for every case. While some arbitrators are good about limiting the amount of discovery that parties can engage in, arbitrators increasingly allow the same amount of discovery that would be allowed in a court. Additionally, arbitrators are less inclined to grant dispositive motions, particularly motions based on lack of evidence (as opposed to a motion on a purely legal ground). Another consideration is the cost of the actual arbitration process; a well-drafted mandatory arbitration program typically requires the employer to pay all fees and expenses in excess of what the costs would be in court. In some cases, these costs can be considerable and disproportional to the amount at issue in the dispute. Your local judge, on the other hand, is paid by the taxpayers.

In our experience, most companies that we work with that have adopted arbitration programs have been generally satisfied with their programs, even though they might have achieved better and cheaper outcomes in some of the cases that were arbitrated. But in considering whether to implement an arbitration program, employers need to consider these factors with respect to their own situation — whether your company specifically would benefit from an arbitration program. For example, if your company has rarely been the target of employment cases and it has a reputation for being a good corporate citizen in the jurisdiction where a trial would be held, you may be better off in front of a local judge and jury.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.