Compass Newsletter - Articles

"Funny" Things Happen on the Way to the Forum:

Arbitration of Employment Claims

by Eric Yandell
Fall 2004

In 2001, the U. S. Supreme Court seemingly cleared the way for employers to require arbitration of virtually all employment claims. In October 2003, the Ninth Circuit Court of Appeals ( which governs Oregon ) reversed an earlier decision and held that claims under the principal federal discrimination law (known as Title VII ) could be arbitrated, if the employment contract required it. Another recent Ninth Circuit case held that employees could be obligated by contract to arbitrate claims based on Oregon state discrimination statutes. Despite these positive signs, however, things are not as clear-cut as they seem. Employers should consider carefully whether to include an arbitration provision in their employment contracts, and how best to do it.

Arbitration offers a number of benefits. Generally, it is faster and cheaper than going to court. It has fewer formalities, which can save expense in developing the types of testimony that would be needed in court, and the procedures are frequently simpler. Statutes of limitation for bringing claims can be shortened by contract. For example, wage claims - including state claims for overtime - can be brought any time within six years of termination. A contractual provision can shorten that time. Arbitration proceedings in general can be expedited by specifying a time frame for each stage of the process. An arbitration provision can be tailored to cover those claims that arise most frequently in a given employer's business.

Many employment claims are fact-specific, which makes them hard to get rid of before trial on purely legal grounds, and which can therefore wind up before a jury. If they go to hearing, however, arbitrators are considerably less likely than a jury to be swayed by impassioned arguments that lead to six-figure awards for emotional distress, or to award punitive damages. Most importantly, an arbitration award binds the parties, limiting expensive appeals to a few, difficult-to-establish, grounds, such as the arbitrator's "evident partiality." In most cases, as a practical matter, arbitration awards end the dispute.

Arbitration, however, is not without its drawbacks. First, although recent cases endorse arbitration, the law is not yet settled, and the right to a jury trial remains paramount in the minds of many. Legislation is currently pending in Congress to restore that right in Title VII cases.

Second, motions available in court proceedings can weed out unfounded or barely supportable claims. Sometimes, elimination of those claims can save money, particularly where trial would require a major investigation or an expensive expert opinion (e.g. medical testimony). While these motions are technically available in arbitration, arbitrators often view a full hearing as one of the trade-offs for going to arbitration and are reluctant to deprive a claimant of that process. Moreover, the speed of arbitration can make motions counterproductive, because an employer must continue to develop its case while the motions are under consideration.

Third, the limitation on appeals is a double-edged sword. A dissatisfied employer must live with an award just as a disgruntled employee must.

Fourth, courts that allow arbitration of employment claims stress that the arbitration procedure should be the functional equivalent of going to court. An employee must be able to bring the same claims, conduct the same kinds of discovery, and seek the same kinds of damages, including emotional distress and punitive damages, as she could in court, all at an equivalent cost. As a practical matter, because arbitrators charge for their time, and because many employment laws provide one-sided attorney fees (i.e., an employer cannot recover fees from the employee unless all claims are frivolous), the employer should be prepared to foot the bill for the arbitration.

Finally, because the procedure must be "functionally equivalent" to a court proceeding, employees who want juries will sometimes go to great lengths to get them. As a common tactic, an employee will file his claim in court and, when an employer tries to compel arbitration, will argue that the process set out in the contract curtails his rights under the applicable law. This fight, with appeals, can be nearly as time-consuming and expensive as going to court to begin with.

On balance, larger employers (those with 25 or more employees to whom the ADA , ADEA, and FMLA apply), or employers with a workforce that turns over frequently - like a seasonal workforce - might benefit from a contractual arbitration provision. Smaller employers or those with a stable workforce may be better off taking a chance in court.

Where an employer decides that a comprehensive arbitration program might be advantageous, that program should include several key features:

  • The program should be clearly spelled out in detail and in writing and expressly shared with employees. Before specifying an arbitration service, you should check out its rules;

  • Employees should waive their right to a jury trial by expressly agreeing to arbitration, and current employees should receive consideration for the waiver;

  • The program should not seek to limit substantive rights and remedies available to employees in court, including emotional distress and punitive damages. The chief advantages of arbitration arise from having a single decision-maker, rather than a jury, and from shortening time frames, curtailing procedural maneuvers, and eliminating appeals; and

  • The program should be as inexpensive to the employee as going to court.

While arbitration of employment claims may be attractive to all employers, a decision to impose that process entails a number of considerations that must be carefully thought through. If a decision to arbitrate all claims is reached, the program should be carefully designed and implemented.