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The problem with arbitration
In May, the United States Supreme Court ruled that mandatory arbitration provisions in
employment agreements are enforceable.
In most employment disputes, employees
can file lawsuits in state or federal court to
decide their claims of discrimination, unpaid
wages, or wrongful termination, to name but
a few. The purpose of these mandatory
arbitration agreements is to prevent lawsuits
in favor of cheaper, more efficient
arbitration.
The court also approved similar
agreements that waive an employee’s right
to participate in a class action.
Typically, employees are required at the time of their hire to sign these agreements, which
may also include confidentiality requirements and non-compete terms.
Taking a look at these mandatory arbitration provisions politically, liberal folk tend to disfavor
them and conservative folk tend to like them. While I am generally very conservative when it
comes to employment matters, I do not favor arbitration, which is the reason for this article.
Many of the things about arbitration that make it popular with business people also make it
unattractive to me. An arbitration decision, as long as it is consistent with the matters under
dispute, is virtually impossible to have overturned. If a judge makes a mistake, there are
appeals’ courts; if an arbitrator makes a mistake, that is the end of it.
Further, while an arbitrator can be required by the parties to state the reason for his or her
decision, such a requirement is easy to skirt.
A judge has to make findings of fact and law; an arbitrator, because the decision is virtually
impossible to overturn, only has to justify his or her decision in the broadest terms.
Judges are government officials with ethical obligations; arbitrators are ordinary folk chosen
by the parties to resolve a dispute.
Because arbitrators are not truly answerable to anyone, their decisions vary widely. Further,
because arbitrators are selected by the parties — either by agreement or from a panel of
arbitrators provided by an arbitration group like the American Arbitration Association or the
Federal Mediation and Conciliation Service — they have an incentive to reach decisions that
encourage other litigants to select them in the future.
Those decisions frequently are designed to make no one happy or avoid the appearance that
an arbitrator selected in an employment case, for example, favors either management or labor.
As a result, unfair decisions outnumber the fair ones.
Arbitrations can be cheaper, quicker, and more efficient. If you lose because you have
selected or been given a bad arbitrator, those considerations go out the window.
All the efficiency in the world is no substitute for a correct decision, or at least a decision that
will be reviewed by a panel of judges to make sure it was correct. Renegade arbitrators are
harder to stop than renegade judges.
The class action waiver, which can be part of the agreement, has more to say for it. An
employee who has not waived this right can very easily be added to a class of employees
claiming they were paid improperly, were victims of discrimination, or were otherwise subjected
to mistreatment by the employer.
Many employees prefer not to sue their employers, even when there is a basis, so such a
waiver can be used by the employee to avoid being dragged into a dispute with a company that,
for the most part, he or she likes. This is frequently the case in wage and hour litigation.
One other pitfall of mandatory arbitration provisions is that arbitration can be triggered by a
mere demand. A lawsuit usually requires a complaint filed in court, in many cases after a charge
has been filed with an agency that first looks at the problem.
If all an employee has to do is demand arbitration, employers could find themselves in more
litigation — cheaper and more efficient — than they were before. While it would be good for my
practice, I would not like to see a company that gets sued once every five to ten years find itself
conducting two arbitrations (or more) a year.
If you are interested in mandatory arbitration, despite my arguments against it, I suggest you
contact your lawyer for some model language.
Requiring current employees to agree to it could present some problems, such as what do you
do to the employee who refuses.
Requiring new hires to sign is less confrontational. Again, your lawyer should have
suggestions on how to implement your new mandatory arbitration policy. Beware, however, the
bad arbitrator.

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Frank Kollman is a partner in the law firm of Kollman & Saucier