1998 Lane Reports

Arbitration: The Benefits And Drawbacks For Employers

Monday, February 2, 1998
by Marc J. Lane

Arbitration, mediation and conciliation are increasingly popular alternatives to litigation. And more and more of our clients are including arbitration clauses in their employee handbooks, employment agreements and employee benefit plans.

Arbitration is a relatively speedy, procedurally simple, inexpensive and private process. For those reasons, many employers are understandably attracted to it.

But alternative dispute resolution has its detractors, too. They argue that reduced costs might encourage a disgruntled employee to bring an action which might never be brought to court. What's more, the informality of the system lets plaintiffs proceed without legal counsel, removing still another impediment to conflict.

To make matters worse, arbitration presents special risks to the employer. The rules of evidence don't apply, so hearsay and even irrelevant facts can be brought to the arbitrator's attention and potentially color his or her thinking. Since arbitration results in a final resolution of a controversy, both sides are denied the possibility of an appeal. And the verdicts of arbitrators are too often perceived by observers as "rough-justice" compromises, particularly since formal written opinions are rare.

Still, arbitration is favored by many employers. They want have their differences with employees and former employees resolved without all the hassle, demands and costs that plague the judicial system. They're also motivated to limit the scope of such proceedings; to remove even the possibility of having punitive damages, attorneys' fees and costs awarded against them; and to avoid the well-known uncertainties of jury trials.

When an employer and its employee agree in writing that any of their disputes will be arbitrated, that commitment becomes binding. The U.S. Supreme Court has ruled that arbitration doesn't undermine the Age Discrimination in Employment Act, nor does it weaken the Equal Employment Opportunity Commission's enforcement powers. The Court has also rejected arguments that focus on procedural differences between litigation and arbitration - and arguments seeking to invalidate an arbitration clause based on "unequal bargaining power." Other federal courts have now followed suit, even approving agreements to arbitrate in Title VII employment cases.

Less clear is whether an arbitration clause for ERISA claims is enforceable. And arbitration clauses in employee handbooks or other unilaterally drafted writings probably don't carry much weight - unless the employer takes a further step.

In specific, arbitration is a creature of contract law: employers who see merit in arbitrating their disputes with employees would be well advised to consider securing written arbitration consents from their employees or, better yet, entering into bilateral agreements with them.

Of course, choosing to arbitrate requires a prudent evaluation of all a company's relevant facts and circumstances. Competent counsel should be brought into the discussion at an early stage.


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The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright, 2003 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.

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