Should Your Company Have Arbitration Agreements with Your Employees?
Last month, the Supreme Court issued its opinion in Epic Systems Corp. v. Lewis, finding that employment arbitration agreements that require employees to bring individual arbitrations – as opposed to class actions – are enforceable. This ruling is significant because, for many employers, the prospect of a class action employment lawsuit can be daunting. Odin, Feldman & Pittleman attorneys Sarah A. Belger and Marina Burton Blickley share their views on what this will mean for employment claims.
What is arbitration, and what are its benefits?
Arbitration is a form of alternative dispute resolution that typically provides for confidential resolution of claims before one or more disinterested arbitrators. Arbitration is much more flexible than court proceedings. Unlike a traditional court proceeding, the parties to arbitration select the process and procedures for conducting the arbitration (e.g., types and periods for discovery; hearing location; rules of evidence; how arbitration costs will be paid, including, filing fees, fees for the arbitrator’s time reviewing the dispute and making a decision, attorneys’ fees; and how the arbitrator(s) will be chosen). Alternatively, newcomers to the arbitral forum may elect to use the established rules and procedures of an established arbitration service provider. Simply agreeing that the arbitration service provider’s rules (as of the date of the dispute) will apply can provide more clarity around what the parties intend the arbitration to entail.
How do employers view arbitration?
Over the years there have been many critics against arbitration – especially in the employment claims area. Despite this, federal public policy strongly favors enforcement of employment arbitration so long as the agreement to arbitrate is not susceptible to defenses that apply to contracts in general (e.g., fraud, duress, or unconscionability). In particular, for wage and hour claims (e.g., employee misclassification, overtime, etc.), the purported class can be extensive and the time and cost to defend against such claims can quickly escalate. Moreover, the claim may not be covered by the employer’s insurance coverage leaving the employer subject to substantial unexpected legal defense fees.
Wage and hour claims also are uniquely appealing for plaintiff’s attorneys for some of the same reasons. The potential to represent an entire class means additional damages recovery (or settlement demands) and, if successful, the employer is required to pay the reasonable attorneys’ fees of the plaintiffs.
These two cases contain valuable lessons for businesses concerned about protecting their proprietary information. Lannett shows that courts, given a legal basis, may be inclined to permit certain reasonable disclosures of trade secrets, such as those made in the course of litigation, and further demonstrates the need for the merits of a DTSA claim to be carefully considered before starting down the expensive path of litigating a trade secrets claim. Xoran demonstrates that the failure to comply with the technical requirements of the DTSA can significantly blunt its power. In Xoran, the technical omission of the notice requirement from an employment agreement may have cost the company two-thirds of its potential damages, along with the recovery of its attorney’s fees.
Now that the Supreme Court has weighed in again, finding that employment agreements to arbitrate can include a waiver of class action procedures, should your company start adopting such agreements?
Unfortunately, this is an area where one size does not fit all! Some of the pros of arbitration include: confidentiality, the ability to have a quicker, more streamlined process, having an arbitrator who is particularly knowledgeable about the area of law at issue, no jury (which can tend to make larger damages awards), potentially less cost (but see cons!), and the ability to limit the dispute to an individual claim.
On the other hand, arbitration can often be much more expensive than litigating in court. For employment litigation in particular, this should be a larger consideration. In the employment context, the Supreme Court has held that employees may not be required to pay “prohibitive” costs in pursuing their federal employment rights. In practice, this often means that, except for senior executives, the employer is bearing almost the entire burden of the arbitration costs such as the filing fees, administrative fees, and fees for the arbitrator’s time. In addition, depending upon your court district, the process may not be much quicker than litigating in court. For example, cases filed in the Eastern District of Virginia (a/k/a the “Rocket Docket”) can move very quickly and may be decided without the need for a trial if grounds exist for summary judgment. Conversely, arbitration may not allow for resolution prior to an evidentiary hearing, making a case that could otherwise be resolved through briefings alone, automatically subject to a hearing on the merits. Moreover, while arbitrators tend to be experienced in the area of law at issue, there is a general perception that arbitrators are less likely than judges to sanction parties for misconduct and are more likely than judges to issue a “split the baby” decision. Finally, an arbitration decision is subject to more narrow appeal rights.
What about government contractors?
In addition to the typical considerations for determining whether to adopt mandatory arbitration, government contractors must also keep apprised of limitations that apply based upon their relationship with the government. For example, contractors with the Department of Defense are limited by what is commonly referred to as the “Franken Amendment” from requiring employees to arbitrate: (1) claims under Title VII of the Civil Rights Act of 1964 (e.g., discrimination/retaliation on the basis of race, sex, national origin, religion, or color); or (2) tort claims related to or arising out of sexual assault or harassment (including, assault and battery, intentional infliction of emotional distress, false imprisonment, or negligent hiring, supervision, or retention). The Franken Amendment was adopted in the FY 2010 Defense Appropriations Act, but has been extended each year – most recently with the 2017 NDAA, for any DoD contract in excess of $1 million.
In addition, as many contractors likely remember, the Fair Pay and Safe Workplaces Executive Order issued by President Obama would have prohibited any contractor from requiring mandatory arbitration of Title VII claims or tort claims arising out of sexual assault or harassment. Although the Executive Order was revoked by President Trump, with the continuance of the #metoo movement, the public perception of confidential dispute resolution may be shifting and many states are taking legislative action to discourage confidential dispute resolution of sexual harassment claims in particular. We will address this final point in a future article, so please stay tuned!
Needless to say, employers should continue to reevaluate mandatory arbitration of employment claims as this is an area that is often changing. If you have any questions about this article, please feel free to contact either of the authors.