May 1, 2023

Navigating the Pros and Cons of Employment Arbitration

Employment arbitration is an alternative dispute resolution mechanism where employees agree to resolve their disputes with their employer outside of a court. The use of employment arbitration agreements has become increasingly common, and most attorneys (including this author) advise employer clients that it’s generally better to have them than not. However, despite the oft-promoted advantages, there are also some practical disadvantages of employment arbitration that must be considered.

Arbitration of PAGA Claims

The question of arbitrability of representative actions under California’s Private Attorneys General Act (PAGA) remains very much in flux. The California Supreme Court has granted review in Adolph v. Uber Technologies, Inc., on the question as to whether an aggrieved employee who has been compelled to arbitrate claims under PAGA that are “premised on Labor Code violations actually sustained by” the aggrieved employee maintains standing to pursue “PAGA claims arising out of events involving other employees” in court or in any other forum the parties agree is suitable. The U.S. Supreme Court left the door open for the legislature or the California Supreme Court to settle this question of standing. The California Supreme Court is expected to render a decision on that issue by early August.

With the caveat that the value of arbitration agreements in PAGA collective-action claims remains an open question, let’s explore the practical advantages and disadvantages of employment arbitration.

Advantages of Employment Arbitration

One significant benefit for arbitrating workplace claims is that it can save significant amounts of time and money. In single-plaintiff cases, arbitration is generally less expensive than a jury trial. Extended jury trials can be costly in terms of attorney time spent preparing for trial and participating in pre-trial matters before the court. Arbitrations are typically resolved much more quickly than similar cases navigating the court system. Shortening the time to get to a merits hearing versus a jury trial can save employers substantial legal fees.

Employment arbitration agreements typically include class action waivers. Class action lawsuits can be extremely expensive for employers and can result in significant damages being awarded to plaintiffs. A class action waiver can effectively prevent this type of litigation from occurring. Instead, employees would need to pursue their claims individually, reducing the settlement value of the case.

Arbitrations generally provide for more predictable outcomes. In a courtroom, a jury may be swayed by emotions, prejudices, or other factors that can influence the outcome of a case. On the other hand, arbitrators, many of whom are retired judges, are trained to make impartial decisions based solely on the facts of the case. This can lead to more consistent and predictable outcomes for both employers and employees. The lack of a potential runaway jury also has the advantage of reducing settlement values.

Disadvantages of Employment Arbitration

Although arbitrations are generally cheaper than jury trials, arbitration costs have skyrocketed over the past few years. Unlike litigation, employers must bear almost the entire cost of arbitration, including the fees of the arbitrator, which can reach $60,000 or more. Moreover, several months before the arbitration hearing date, the employer will be invoiced by the dispute resolution service provider for a deposit in the amount of the entire anticipated cost of the arbitrator’s fee. While initially refundable, the deposit becomes nonrefundable as the date of the arbitration hearing quickly approaches. Under California law, if the employer fails to timely pay the initial filing fee or the arbitrator’s fee, the plaintiff can automatically compel the case back to court. Furthermore, there is typically no opportunity for employers to recoup these costs from the losing party. Therefore, unlike traditional litigation, arbitration may impose significant additional fees and costs.

Arbitrators are far less likely than courts to grant dispositive motions which could result in dismissing the entire case, or part of the case. While courts are compelled to clear cases lacking in merit from their dockets, arbitrators are not similarly incentivized. Rather, arbitrators are paid by the hour, and financial considerations may factor into an arbitrator’s decision to not consider or grant a dispositive motion.

Additionally, unlike litigation in court, the scope of appellate review of an arbitration decision is limited. Under the Federal Arbitration Act, a court is permitted to vacate an arbitration award only when it “was procured by corruption, fraud, or undue means,” when “there was evident partiality or corruption in the arbitrator,” when the arbitrator engaged in certain specified misconduct, or when the “arbitrator exceeded their powers.” As a result, courts are reluctant to disturb an arbitrator’s award or provide a forum for the parties to relitigate facts.

Lastly, arbitration agreements can be difficult to enforce. In California, enforceable arbitration agreements must contain numerous employee-friendly provisions, ranging from mutuality of remedy, to the prohibition against limitations on relief, to the assurance of allowing sufficient discovery (fact-finding) to satisfy due process concerns. This means that employers must carefully draft their arbitration agreements to ensure that they are legally enforceable.

To Arbitrate or Not to Arbitrate, That is the Question

Whether employment arbitration agreements are a benefit to California employers is a close call, made more so by the rapidly evolving case law on the arbitrability of PAGA claims. While employment arbitration agreements can provide significant benefits, they can be difficult to enforce, and arbitration can have significant drawbacks. Ultimately, employers must weigh the benefits and drawbacks of employment arbitration agreements and consider whether compelling arbitration makes sense under their individual circumstances. Such considerations should be conducted in consultation with experienced employment law counsel.