Is arbitration a good fit for your company?

The recent Supreme Court decision in Epic Systems Corp. v. Lewis — approving the use of class or collective waivers in arbitration agreements — was undoubtedly a victory for employers.

With a waiver, the employee gives up his or her right to pursue claims against the employer on a class or collective basis. This means that when an employee brings a claim, there will be no obligation to notify other potential claimants. The waivers eliminate an “easy” mechanism for more employees to become plaintiffs themselves — either by default in the case of an “opt out” class action, or by “opting in” to a collective action.

The result could be a substantial reduction in the number of employees who assert claims, a reduction in the damages to which the employer is exposed, and a reduction in the significant costs and defense fees usually associated with defending class and collective actions.

What employer wouldn’t want that?

The “catch” is that mandatory waivers have been approved only in the context of arbitration. Which raises the question: Is arbitration the right thing for your company? Here are some points to consider.

Benefits of arbitration

• Proceedings are usually confidential.
• You don’t have the risk associated with a jury.
• You have some degree of control over the selection of the arbitrator.
• Arbitrations are usually resolved in less time and have limited options for appeal.
• Arbitrations can be less formal, with less technical adherence to rules of evidence and procedure.
• Arbitration awards are lower on average, and less likely to include punitive damages.
• Arbitration agreements can include waivers of class and collective actions.

Drawbacks of arbitration

• Agreements must be carefully drafted and can be difficult to enforce, especially in some jurisdictions.
• There are ways to get around the confidentiality requirements (for example, think about Gretchen Carlson and Roger Ailes).
• The looser rules of evidence and procedure can disadvantage employers as well as employees.
• Dispositive motions, such as motions for summary judgment or motions to dismiss, are rarely granted in arbitrations.
• Some arbitrators tend to “split the baby” in an attempt to keep both sides happy (or equally unhappy).
• Arbitration costs money, and the employer usually has to foot the bill — including the arbitrator’s hourly fee and retainer.
• Other parties with the authority to bring claims on behalf of an employee — including the Equal Employment Opportunity Commission and the U.S. Department of Labor — are usually not bound by arbitration agreements.

Despite the drawbacks, arbitration is usually worthwhile for larger employers (those with 50 or more employees), employers in industries that are particularly susceptible to wage and hour claims (telecommunications, retail, or food service), and employers who have insurance policies that cover the costs and fees related to arbitration.

Employers must decide whether to retain or begin an arbitration program after carefully considering the advantages and disadvantages of arbitration, many of which are unique to certain industries. The ability to avoid one jury trial in an employee-friendly jurisdiction may justify the higher cost of defending five separate claims in arbitration. And, obviously, preventing just one class or collective action can outweigh several years of increased costs associated with an arbitration program.

It is critical for employers to accurately quantify their risks and exposure, and then run a cost-benefit analysis to determine whether arbitration makes sense for their company.