Alternative Dispute Resolution: Is Arbitration in YOUR Small Print?
Nan Knight

Printer-friendly version

You've had about all you can stand of your boss's remarks about your hair, clothes, accent, and even your car. You go in for a confrontation and come out demoted. "I'm getting a lawyer and suing you and this company for every penny you have!" you shout. "No, you're not," says your boss with equal heat. "You signed away that right. All you'll get is arbitration!"
What's arbitration? And how did you become legally committed to go through this process instead of through the courts? You may be about to learn the answers the hard way.

In March 2001, the U.S. Supreme Court delivered a ruling that could have a substantial impact on your employment rights-and experts say that chances are you may not even know whether the decision affects you. In ruling on Circuit City v. Saint Clair Adams, the court held that employers could both require and enforce binding arbitration agreements in the workplace. If you thought terms like "binding arbitration" and "dispute resolution" were restricted to labor unions and employees negotiating as large groups, you're wrong. Most employers currently adding arbitration clauses to their standard pre-employment agreements are aiming squarely at the individual employee. You'll be better prepared to decide whether to agree to arbitration-and ultimately use it to your own advantage-if you understand the process, its appeal to employers, and how it works.

Arbitration: The Alternative Dispute Resolution Process in Action

Arbitration is the most popular of a number of workplace strategies designed to end employment disputes before they reach the court system. Known collectively as "alternative dispute resolution" (ADR), these strategies emphasize the use of impartial or neutral third parties, confidentiality, and an agreement by all sides to work together in a professional manner to end the dispute. ADR can be as simple and informal as calling in a "neutral fact finder" or referee, who investigates the issues in the dispute and then reports back to both the employer and the employee on the results, or as complex as a mini-trial, staged in the offices of a neutral third party who acts as a judge.

The key in every type of ADR is that both parties, the employee and the employer, must agree beforehand that the results will be recognized as binding. Getting an employee to sign such an agreement once he or she believes a court case may prove more lucrative (and perhaps satisfying) can be extremely difficult. For this reason, many companies now require that new workers sign agreements to arbitrate disputes as part of their initial employment paperwork-and sometimes even as part of their job applications. As a result of the recent favorable Supreme Court ruling, other companies have responded to legal advice and distributed such agreements as a "must-sign" to current employees.

What to Look for in Your Agreement

If your employment agreement or pre-employment paperwork requires that you sign an arbitration clause, you may want to have your lawyer look over the wording carefully before you sign. Look for:

Wording. The terms and conditions of the arbitration should be carefully spelled out. Most agreements state explicitly that you're waiving your right to go to court with employment disputes. In any arbitration you should have the right to your own counsel, the expectation of a neutral and fair arbitrator, and access to the information you need to pursue your complaint--make sure that none of these basic elements are contraindicated in the document you sign.

Who, What, Where, When. As part of the specifics, you'll want to know how the arbitrator will be chosen, where the arbitration will take place (at your company or elsewhere), and whether or not you are limiting yourself to a certain time period during which disputes must be resolved. Make special note of any "red flag" clauses that limit the amount your employer may have to pay in a dispute, eliminate the possibility of punitive damages, or give your employer the right to name the arbitration panel.

Form. If your arbitration agreement is a clause within your larger employment agreement and not a separate document, your lawyer may advise that you have leverage not to sign. Integrating such agreements into the larger employment package may sometimes be construed by the courts as exerting undue influence on prospective employees.

What to Expect from Arbitration

Expect due process. AAA and JAMS have issued standardized guidelines and protocols for the conduct of arbitration proceedings. Your lawyer should be familiar with Resolving Employment Disputes by AAA and JAMS' Policy on Employment Arbitration: Minimum Standards of Procedural Fairness. Both are based on doctrines of due process in arbitration as prescribed by studies from the Departments of Labor and Commerce in the 1990s. You may not be in a court, but rules still prevail.

Be prepared with facts. You need to be just as prepared with facts, potential witnesses, and other documentation as you would for a court appearance. A good arbitrator will want to hear all sides of the story and view any supporting evidence. The evidence collection period may last as little as a couple of days or, in rare instances, as long as several months. Sometimes evidence is given in a formal setting, with all parties present, and other times it is collected on a more ad hoc basis.

Remember what "neutrality" means. The arbitrator may be a perfectly nice person, but he or she is not your friend. Don't cross the line by trying to be too charming or sociable-and, if possible, avoid meeting with any member of the arbitration panel without your lawyer. But do make sure that the arbitrators hear and understand everything you have to say.

The Attraction of Arbitration

Most employers find that pre-employment arbitration agreements ultimately work to their benefit. The advantages are numerous:

The issue is almost always resolved more quickly. Many employment disputes can take as long as five years to resolve in the court system. Arbitration is scheduled more quickly and is often complete within months.

The details of the dispute remain private. With none of the contested issues on court records and with a settlement agreement to keep negotiations quiet, no company secrets or organizational "dirty laundry" are aired.

Costs are minimized. Arbitration fees are only a fraction of court costs, and settlement fees, if any, paid to the employee are often lower (and in some cases lower by hundreds of thousands of dollars) than a sympathetic jury might have awarded.

Meeting disputes head-on. If arbitration is begun early enough, some disputes may be resolved before they become more complex, involve additional employees, impair organizational function, or become public knowledge.

The room for appeal of decisions is limited. Although this is a two-edged prospect, more often than not the employer profits from previously agreed-upon limits on appeals of the arbitration decision.

Companies that adopt arbitration agreements face a few disadvantages:

More claims, more red tape. Some observers believe that the existence of an arbitration program, when it is explained consistently and clearly, may encourage the filing of spurious or frequent claims by employees. Documenting the chain of administrative action and reaction to such claims can be costly and time consuming. In addition, employers usually pay the cost of the arbitration process, including, in many cases, the fees for the employee's representation. The result is an open door to new claims and counterclaims.

Employee dissatisfaction. Some price in ill will may have to be paid for instituting these agreements. Some employees come to resent both the process and the employer and believe that they've given away a valuable right to legal recourse.

What's In It for You?

Some of the same advantages that arbitration brings to employers may benefit you as an employee:

Speed: You won't find yourself in court again and again over several years as you wait for the issue to be resolved.

Privacy. The details of your claim will be protected from public scrutiny, of special incentive to employees whose claims focus on sexual harassment, personal activities, or private information.

Economic predictability. Your employer will probably pay for the arbitration and may pay for your representation. Unlike a possibly prolonged court battle, you'll know from the start approximately how much the claim will cost you, win or lose.

Benefits of early and amicable resolution. If your claim is resolved quickly, without lengthy and acrimonious legal proceedings, it's less likely to escalate to the point where you are no longer comfortable working in the company or industry.

What Do You Give Up?

Many advisors would say that, although you should think carefully about signing away your right to due process within the court systems, most arbitrations are conducted equitably, with timely and efficient resolutions. However, a number of observers have voiced strong opposition to arbitration clauses, calling them deliberate attempts to rob employees of Constitutional rights and civil liberty guarantees. Moreover, the Equal Opportunity Employment Commission (EEOC), groups supporting women and minorities, and a growing number of voices in Congress and in state legislatures around the country opposed the recent Supreme Court ruling.

In a strongly worded statement issued on June 20, 2001, then National Organization of Women (NOW) president Patricia Ireland stated, "mandatory arbitration systems are often stacked against the employee." After several studies by NOW, EEOC, and others, she concluded that such agreements lend themselves to abuse because:

Some do not allow employees to have their own attorneys at the arbitration proceedings; others give employers the sole right to choose the arbitrators. Many companies disallow discovery, the ability of the employee to subpoena relevant documents and other evidence prior to the hearing. Employees may face a panel of arbitrators with no experience, interest or expertise in equal employment or other laws that cover workers on the job. They are less likely to be fully compensated for the damage they have suffered or the attorneys' fees and costs of the arbitration; indeed, they often face arbitration fees that are many times what a court's filing fees would be, sometimes paying even more than the damages they are awarded. Except in cases of extreme legal error, the employees have no ability to appeal the outcome of the arbitration.

Most compelling in the arguments Ireland made against mandatory arbitration is the following statement: "If proponents of arbitration are correct in their argument that it is faster, cheaper, and better than the judicial system, then surely employees and their attorneys will opt for arbitration in a voluntary system." That is, if arbitration is so wonderful for employees, then why does it need to be mandatory?

Other advisors see arbitration as problematic even for employers. When asked if employers should routinely use such agreements, Aaron P. Morris, who heads the Morris Law Firm in Costa Mesa, CA, says, "In my opinion, no." In his extensive practice, the advantages of arbitration rarely outweigh the disadvantages, for employers or employees. Cost? "The cost of litigating a matter is not so much higher than the cost of arbitration," he says, noting that the difference in cost is certainly not great enough to warrant giving up the greater protections of the court. Time? In many cases, summary judgments can be obtained from courts early on in a proceeding, but arbitrations must be carried out to completion.

Stay Informed

Morris and others caution that the legal status of mandatory arbitration agreements and other forms of ADR are likely to change frequently. Before signing any arbitration agreement-whether as part of an application, an employment sign-on package, or when you're already on the job-you should consult a lawyer. The right to recourse to the judicial system is one of your basic rights: don't sign it away without being fully informed about the consequences.

Sidebar Update: New Ruling on Arbitration

Nan Knight is a freelance science writer and editor whose credits include Smithsonian exhibits, Discovery Channel Web sites, and a wide range of publications on radiation in medicine.