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Arbitration Pros and Cons

In the interest of full disclosure, I am a huge proponent of arbitration of employment disputes as beneficial to employers. Frankly, I do not understand why more employers do not use arbitration. After some internet research on the topic, I have identified the following commonly stated pros and cons of arbitration:

Pros:

  1. Lower cost of arbitration
  2. Increased flexibility in scheduling
  3. Reduced chance of excessive awards often associated with juries
  4. Less publicity

Cons:

  1. No meaningful appeal procedure
  2. Some arbitrators to ignore the law
  3. Possible increase in employee claims
  4. Tendency of arbitrators to “split the baby” when issuing an award

As for the Pros, my recent experience is that there may be a lower cost, but a lot depends on how willing your arbitrator is to limit the proceedings. I have had arbitrations that are probably more expensive than litigation when all is said and done. Increased flexibility is nice, but I cannot see it as driving someone to adopt an arbitration program and the same goes for the less publicity aspect. The real benefit to arbitration for employers is the reduced chance of an excessive jury award. Arbitration is a huge win for employers for this reason alone. Unlike juries, arbitrators need proof of damages and base awards on logic and the law rather than feelings and misperceptions (e.g. a big company won’t miss a couple million bucks). Even better, most plaintiffs' attorneys understand this aspect of arbitration and adjust their settlement expectations accordingly.

As for the Cons, it is true that appeal is limited but I don’t see this as trumping the Pros, specifically the avoidance of excessive awards. The fact that some arbitrators ignore the law is meaningless. Some judges ignore the law too — it’s part of the legal system. However, in arbitration you get some input into which arbitrator will decide your case and you can usually strike someone who looks bad on paper. You don’t have that option with judges in most cases. I have heard the argument about an increase in claims many times but have never seen any evidence to support it. What I have seen frequently is employees who attempt to get their claims into court but drop them after being ordered to arbitrate. Finally, I have had arbitrators split the baby in the past, but more often than not this takes the form of a nominal award on a secondary claim, e.g. a claim for unpaid vacation or commissions. Again, I do not see this as trumping the Pros.

So there you have it in a nutshell, the overwhelming case for adopting arbitration as a means of limiting exposure for employment claims. Sadly, there is trouble in this risk avoidance paradise. Both the House and the Senate are currently considering the Arbitration Fairness Act of 2009. If passed, the Act would ban forced arbitration in employment, as well as in consumer, franchise and civil rights disputes.

What should you do if the Arbitration Fairness Act passes? Tune in for my next post and I’ll give you some ideas.

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