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RISKVUE ARCHIVE | INDUSTRY WATCH > EMPLOYMENT PRACTICES LIABILITY (EPL)
Mediation And Arbitration Of Employment Disputes
Settling a dispute through the law is like losing a cow for the sake of a cat.
—Chinese Proverb
A lean compromise is better than a fat lawsuit.
—Italian Proverb
By Don Phin
Employee claims now make up one-third of all the federal civil dockets and one-fifth of state court dockets. Just the cost of defending a claim can easily exceed $100,000. On top of that, million-dollar verdicts seem commonplace. Those are just two reasons why cost-effective dispute resolution is a key ingredient of a successful risk management plan. Alternative Dispute Resolution (ADR), which may serve as a means to avoid costly litigation, consists of at least three elements: negotiation, mediation and arbitration.
- Negotiation is the most informal, least expensive method of resolving disputes. It involves objective decisionmakers within the organization working with the parties to reach equitable solutions. This can include ombudsmen and peer-review programs.
- Mediation, a more formal yet non-binding process, uses a neutral mediator to help negotiate or “broker” a dispute settlement. You can't force someone to mediate a claim, so there are few if any legal issues surrounding this process. According to statistics, 85% of claims that go through mediation get resolved. Once an agreement is reached through consent of the parties, it is generally binding on the participants. This includes both internal and external programs.
- Arbitration is a means of reaching a final, binding resolution of disputes that cannot be solved through more informal techniques. It is viewed as less costly and more effective than litigation. Sometimes non-binding arbitration is imposed by court procedures.
Use of pre-dispute arbitration clauses as a condition of employment is gaining increased acceptance in the federal and state legal systems. Such clauses are generally recognized as a legitimate means to avoiding the litigation of employment-related disputes, given certain guidelines are followed by the employer. Careful drafting of arbitration clauses, with an emphasis on impartiality and informed waiver of rights by the employee, is key to a successful arbitration process.
The United States Supreme Court permits mandatory arbitration agreements as a condition of employment (Circuit City Stores v. Adams). Now that the attorneys have gotten what their clients asked for, the challenge becomes how to manage a litigation practice where the vast majority of claims will be dealt with in arbitration as opposed to the courtroom. Many attorneys recognize that this is a mixed blessing as far as their practices go. In order to remain as profitable, they will have to become ever more proficient at standardized operations. As stated in a recent issue of California Lawyer, today’s law firms “will have to turn employer defense into a more efficient, higher-volume business. That means standardizing briefs, establishing a flat-rate billing system and developing databases that flag arbitrators who have a habit of rewarding employees with big judgments. The article points out that plaintiff’s lawyers are not as affected by arbitration as they can get an award more quickly, the employer has to foot the arbitration bill, and can’t prohibit an arbitrator from awarding attorney’s fees.
As you can expect, there will be continued fights over the language of the arbitration agreements especially when it comes to the procedures to be followed.
Before employers get too giddy about this trend, they need to know that there is a down side to arbitration as well. The primary downside is the aberrant arbitrator’s award, which is very difficult to overturn on appeal. In California as well as in most other states, arbitrators have broad discretion and the decisions cannot be reviewed for errors of fact or law. In essence, the law requires anyone challenging an arbitration award to attack the arbitrator’s integrity.
So that you don’t get nailed with an aberrant award that you can’t then appeal, you or your attorney should investigate the history, qualifications, and interest of the proposed arbitrator. You should be careful of any financial incentives based on past experience or current relationships. Note that while arbitrators are required under most state statues to reveal any conflicts of interest, as a party, that obligation is a slippery slope to stand upon.
Lastly, arbitration can be especially tricky where class actions and other complex cases are involved. For example, in discrimination-type cases the claimants may seek different types and amounts of relief including back pay, future pay, reinstatement, non-monetary relief, or punitive damages. In this type of situation, the arbitration can go through a two-step process where the damage phase is handled by a special master based upon an agreed-upon formula. By using former judges or lawyers to allocate settlement funds, both plaintiff’s counsel and defendants eliminate conflicts, and inefficient administrative work.
Drafting The Agreement
Unfortunately, arbitration is looking more like litigation every day. Judicial involvement, which arbitration attempts to avoid, is rapidly becoming a part of the process. To withstand judicial scrutiny and bring clarity to the party’s expectations, it is recommended that an employer-drafted arbitration clause address the following:
1. Neutral Arbitrator or Mediator — You should decide whether the American Arbitration Association, JAMS, National Arbitration Forum, or some other third party will be the neutral arbitrator of claims.
2. What Rules Will Apply — You can use the rules set forth by federal or state statutes, as well as those utilized by the various organizations. For example, you can chose to have an arbitrator from the American Arbitration Association follow rules set forth in the California Civil Code or use their own.
3. Location and Choice of Law — Any agreement should identify where the arbitration will take place, if not in an area encompassing the employee’s last place of employment. It should also identify which state and federal laws will apply to the dispute. These clauses are particularly important for multi-state organizations.
4. Definition of Rights Waived — Any agreement must be very clear as to what claims will be arbitrated and what claims will not. The drafter should pay particular attention to including Title VII and ADEA claims, as well as other federal and state statutory violations. Employers will typically not include trade secret and proprietary property enforcement due to the need for injunctive-type relief. A company is not capable of preventing an employee from filing claims for worker’s compensation, unemployment, or with any federal or state fair employment agencies.
5. Picking of Arbitrators — The agreement should either define or give reference to the process for choosing arbitrator(s). Typically the decision has to be made to use one or three arbitrators. While three arbitrators may reduce employer risk, it will also increase employer cost.
6. Qualification of Arbitrators — Many entities, such as the AAA, use both attorneys and non-attorneys, retired judges, and professional mediators. Either check the procedural rules followed by the arbitration organization or clearly define the expected qualifications of any arbitrator. Since judicial review of any decision is limited, it is strongly suggested that an experienced attorney or retired judge with experience in the specific area being arbitrated be chosen. For example, if you are arbitrating an ERISA claim, an attorney or retired judge with benefits law background is preferred.
7. Right of Representation — Almost all due-process protocols allow representation of the employee in both the mediation and arbitration setting.
8. Statue of Limitations — We have yet to see an arbitration provision struck down because of a statue of limitations of one year or more. Any statute of limitations shorter than a year may be rejected by the courts and place your agreement at risk. The statute of limitations of a year has the potential of cutting off a number of different tort claims including misrepresentation, fraud, and possibly others.
9. Fair and Equitable Discovery — Much of the cost savings associated with arbitration arguably come from limited discovery procedures. However, the courts will not enforce an arbitration provision that places unreasonable discovery limitations on either party.
10. Damages Allowed — Any provision must allow for all of the types of relief available in court, including punitive damages. Under most procedures, arbitrators have discretion to award fees and costs to prevailing parties. If you want to make sure that they are forced to do so, you should use “shall” type language.
11. Statement of Decision — It is suggested that any arbitration provision clearly define the requirement that the arbitrator set forth findings of facts and conclusions of law, which would allow for judicial review. This is especially so because it is so difficult to overturn arbitration decisions.
12. Creating an Enforceable Agreement — Any arbitration agreement should be entered into as a separate document. Placing it within an employee handbook could render it unenforceable due to the typical contract limitation language found. It should be signed by both the employer and employee and a copy placed in the employee’s personnel file. A number of courts have ruled that an employee’s continued employment is consideration enough for enforceability. Other courts have come out the other way.
13. Getting Creative — Once in the process, you can stipulate to a wide variety of potential outcomes. For example, you can agree to a minimum and maximum verdict amount. You can also prepare hidden judgment, which become enforceable depending on which amount the arbitrators’ verdict comes closer to. The possibilities are only limited by the parties’ imagination and risk tolerance.
Unresolved Legal Issues
It appears that most of the federal courts have embraced the notion of employment dispute arbitration except for the 9th circuit, which has ruled that Title VII and ADA claims cannot be waived by way of an arbitration agreement. While there remains some uncertainty as to the enforceability of arbitration agreements when it comes to statutory claims, the company must at the minimum present a “clear and unmistakable waiver of statutory claims.” (Wright v Universal Service Corp. (1998) 525 US 70, 78-79.) On the pro side, courts have ruled that arbitration agreements are enforceable where they are a mandatory condition of employment, where the employee did not read the arbitration agreement, where the employee did not understand the arbitration agreement, and where the employee did not receive additional consideration for the arbitration agreement other than continued employment. In contrast, courts have attacked arbitration agreements where they attempt to limit available remedies, where they are not administered by an independent organization, and where they are not affordable to the employee.
There are many sources of information employers may review when deciding whether to utilize mediation and arbitration procedures. Sources include:
In addition, particular state codes, such as the California Arbitration Act, Code of Civil Procedure § 1280-1294.2, should be consulted. 
ABOUT THE AUTHOR
Don Phin is an attorney who for more than 16 years, has specialized in the litigation of employment and business cases. He has represented hundreds of employees, partners and companies in that time. Don has litigated wrongful termination, race and age discrimination, sexual harassment, whistle-blower, trade-secret theft, fraud, partnership dissolution and many other cases to a successful conclusion. In 1995, Don obtained the status of a Certified Professional Consultant to Management (CPCM). Since then, he spends a large part of his time consulting, writing, speaking and coaching.
Don’s seminars, workshops and reports have been delivered to such groups as the International Risk Management Institute, Insurance Marketing and Management Services, The Executive Committee, The CEO Club, The Society for Human Resource Management, Foundation of Enterprise Development, The National Human Resource Association and The National Association of Professional Consultants to Management.
Risk management is about possibilities and probabilities. It’s about assessing the 80/20 of exposure and then committing the strategies and tools needed to protect yourself. I hope these insights will help those of you battling on the front lines.
riskVue | The webzine for risk management profesionals
October 2002
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