To Litigate or Arbitrate – What Should an Employer Do?

March 26, 2014

Despite employers’ best efforts to eradi­cate discrimination as well as other poten­tially illegal workplace conduct such as wage and hour violations, employment litigation remains steady. Class actions against em­ployers suffered a momentary setback after the U.S. Supreme Court’s decision in Wal-Mart v. Dukes, but plaintiffs’ attorneys have been reloading with novel ways to file viable collective and class claims against employers.

If you require employees to arbitrate employment disputes, you should have your arbitration agreements reviewed to ensure they’re legally enforceable and appropri­ately worded to prevent class claims. If you don’t require employees to resolve disputes through arbitration, you should seriously consider doing so. This article discusses the merits of private arbitration.

What Is Private Arbitration?

Private arbitration is a means of re­solving disputes that would otherwise be resolved through the court system or an administrative agency. The arbi­tration may be administered through organizations such as the American Ar­bitration Association (AAA), or the par­ties may choose to self-administer the entire process.

Generally, an arbitration will be de­cided by a single arbitrator or a panel of three arbitrators chosen by the parties. An arbitrator is typically an active or retired attorney who specializes in the field of law that’s the subject matter of the dispute. However, there’s no re­quirement that the arbitrator be a li­censed attorney. In construction dis­putes, for example, architects, engineers, or contractors may serve as arbitrators.

The precise arbitration procedures will be determined by the clause or contract that establishes arbitration. The agreement may say that the arbitration procedures will follow the AAA Em­ployment Arbitration Rules, which may limit the amount of discovery (deposi­tions, interrogatories, and document requests) that can take place before the arbitration.

Arbitrators typically don’t use pro­cedures such as summary judgment (a decision on the merits before the hear­ing). After discovery is completed, the case is resolved at a hearing before the arbitrator or arbitrators. The hearing may be as short as a day, or it may last for weeks, depending on the complexity of the dispute.

The arbitrator swears in witnesses, and the attorneys for the parties ask questions like in a normal court pro­ceeding, but the rules of evidence gener­ally aren’t strictly enforced, and the ar­bitrator may also have questions for the witness. The parties typically submit posthearing briefs, or arguments. The arbitrator considers all the evidence and applicable law and then renders a written decision.

How Does Arbitration Differ from Mediation?

Mediation is a purely voluntary form of alterna­tive dispute resolution. A mediator, like an arbitrator, is typically an attorney with specialized knowledge in the area of law at issue. Many mediators are also arbitrators. However, mediations generally don’t involve testimony from witnesses.

The mediator will solicit written positions from the parties ahead of the mediation and then meet with the parties to fill in any blanks. Once the mediator under­stands the key facts and law, he attempts to get the par­ties to agree on a monetary amount (or other remedies) that will conclusively resolve the matter. Unlike arbitra­tion, which involves a binding decision from the arbi­trator, the mediator has no power to force the parties to enter into a settlement.

In mediation, if the parties don’t get on the same page, there is no settlement, and the case continues. In arbitration, once the arbitrator makes a decision, it’s gen­erally final because arbitration awards can be appealed only on very narrow grounds—e.g., if there was some kind of fraud underlying the arbitrator’s decision or an undisclosed bias that may have affected the decision.

What Should an Arbitration Agreement Say?

An arbitration agreement between an employer and an employee should be in writing and signed by both parties. The arbitration agreement can be part of an em­ployment contract with the employee (even an agree­ment for at-will employment), or it can be a separate agreement. Generally, the guarantee of continued at-will employment is sufficient “consideration” for the agree­ment to be enforceable, and the employer isn’t required to pay the employee additional compensation to make the agreement enforceable.

Making the arbitration clause part of an employee handbook isn’t recommended, even if the employee signs an acknowledgment that he has received and read the handbook. The agreement should include a provi­sion that the employee waives the right to become in­volved in class action litigation or classwide arbitration. That’s a key provision because it will prevent the em­ployer from being subjected to class action litigation or classwide arbitration if it’s properly drafted.

The agreement typically should indicate that the employer will pay for the cost of the arbitration. It should specify which arbitration rules apply, and if those rules don’t indicate the scope of discovery, it should specify what type of discovery is allowable. The more the dis­covery process is consistent with the Federal Rules of Civil Procedure, the more likely the arbitration agree­ment will be enforceable.

The employee must be entitled to the same remedies that would be available as part of a court or adminis­trative proceeding. The employer can reserve the same right to obtain attorneys’ fees that would be narrowly allowed in a court proceeding, but it cannot require the employee to pay its attorneys’ fees in a broader manner than would be available if the parties went to court. The location of the arbitration should generally be where the employee works. The agreement needs to include a fair provision for how to pick a neutral arbitrator.

A properly drafted arbitration agreement can pre­vent both class action litigation and classwide arbitration proceedings. In other words, each individual employee would be required to prosecute his own claim in an in­dividual arbitration proceeding. An employee could not join forces with other employees and maintain a class ac­tion in court or at arbitration.

Will Arbitration Preclude an EEOC Investigation?

Private arbitration doesn’t stop the Equal Employ­ment Opportunity Commission (EEOC) from investigat­ing discrimination on either an individual or a classwide basis. The EEOC is free to commence litigation against the employer regardless of whether the same dispute is being arbitrated. Practically speaking, the EEOC may decide to defer action until the arbitration hearing has been concluded or until after the parties otherwise re­solve the matter.

Depending on the outcome of the arbitration or set­tlement, the EEOC may decide not to pursue the mat­ter. It’s generally in the employer’s best interest to in­clude the EEOC as part of any settlement agreement in cases where the agency is taking an active role, so the employer gets the EEOC’s blessing on the settlement (if possible).

If an employer and an employee in Madison have a valid arbitration provision, the Madison Equal Op­portunities Commission (MEOC) will allow the claim to be resolved through arbitration, although the MEOC will retain jurisdiction over the matter to ensure it was properly resolved through a fair and impartial arbitra­tion proceeding. The Wisconsin Equal Rights Division (ERD) will likewise defer to arbitration, but only if the arbitration is broad enough to cover administrative pro­ceedings. An arbitration clause that simply states that all claims subject to court proceedings will go to arbitration will not stop a potential ERD investigation and hearing on the claim.

Bottom Line

An arbitration agreement can be an effective tool for pre­venting class action litigation or classwide arbitration. However, you must comply with many technical requirements to ensure an arbitration clause is bulletproof and doesn’t create the po­tential for litigation or arbitration over the enforceability of the clause itself.

Employers should seriously consider requiring all employ­ees to sign arbitration agreements. However, given the highly technical nature of arbitration clauses, you should retain experi­enced counsel to review any current arbitration clauses or draft new ones. Finally, at a minimum, you should consider a provi­sion in which employees agree to waive the right to a jury trial so disputes that end up in court are decided by a judge and not a jury.

This article was featured in the March 2014 issue of the Wisconsin Employment Law Letter, which is edited by Attorney Michael J. Modl and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.

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