In this Q & A the team at Fox Rothschild LLP provides you with the information you need to know about Employment Arbitration, the pros and cons, what the recent Supreme Court ruling means and more.
Questions & Answers
By Glenn S. Grindlinger
Question: What is Arbitration?
Answer: Arbitration is a private dispute mechanism where the parties adjudicate their dispute in front of a neutral individual selected by the parties rather than in court before a judge and/or jury.
Question: How does arbitration work?
Answer: Once the parties agree to have their dispute arbitrated, one party will file a request for arbitration, typically with a private arbitration service. Then, through a process of mutual consent, the parties will select an arbitrator who will hold conferences with the parties to discuss how the arbitration will proceed and whether there will be discovery and the extent of the discovery process.
Question: Is there a trial in arbitration?
Answer: Yes. Generally, the arbitrator will hold a trial – called a “hearing” – in which witnesses will present evidence and the parties will have the opportunity to examine and cross-examine witnesses. After the hearing, the arbitration will issue a decision, known as an “award.”
Question: Is arbitration binding?
Answer: The arbitrator’s decision is usually final. There is no right to appeal. While there is a legal mechanism to have an arbitration decision overturned, the grounds to do so are extremely narrow.
Question: How do the parties agree to go to arbitration?
Answer: The parties execute an agreement that require the parties to arbitrate disputes that arise between them. The agreement is signed, is just like any other contract. The agreement will usually explain the procedures that will be undertaken when the parties go to arbitration, where the arbitration will take place, what damages and remedies are available, and the types of claims that will be arbitrated should they arise.
Question: Can employees agree to arbitrate a dispute before the dispute arises (i.e., in advance)?
Answer: Yes. Parties can agree to arbitrate disputes or potential dispute in advance or even after a claim has been filed.
Question: Is there a law or statute that governs arbitration?
Answer: Yes. The Federal Arbitration Act (“FAA”) governs the enforceability of arbitration agreements and addresses how arbitration awards can be overturned. In addition, New York has a similar statute, CPLR Article 75. The FAA states that agreements to arbitrate must be treated as all other contracts and individual states cannot treat arbitration agreements differently simply because they impact employees.
Question: Are there any disputes that cannot be arbitrated?
Answer: Yes. Claims for unemployment, disability, or workers’ compensation benefits cannot be arbitrated. Claims brought by a governmental agency cannot be arbitrated. This means that if an individual files a claim with the New York State Division of Human Rights or a similar governmental agency (rather than filing an action in a court), that claim can proceed because it is brought in the same of the State of New York. In addition, New York recently passed a statute that prohibits arbitration of sexual harassment complaints, but there is a legal issue of whether that law is enforceable under the FAA.
Question: Who pays for arbitration in the workplace?
Answer: In most cases, the employer has to pay for the cost of arbitration, except that the employee may be required to pay an amount equal to the filing fee that he or she would have to pay to commence an action in state or federal court.
Question: How much does arbitration cost?
Answer: The cost of arbitration will depend on how complex the case is and how many hearing days there are. Typically, excluding the cost of attorneys’ fees, arbitration costs can run from approximately $10,000 to well in excess of $50,000. Attorney fees can easily run into the six figures for each side in a single-plaintiff discrimination or wage and hour dispute – before damages are even assessed.
Question: Can I limit the types of claims that are brought in arbitration? For example, if I only wanted wage and hour claims to be arbitrated but all other claims brought in court, can I do this?
Answer: Yes, you can agree to arbitrate only specific claims and agree to go to court for any other claims. However, why you would only want to arbitrate some claims and not others is an issue that you should discuss with counsel.
Question: Where does the arbitration take place?
Answer: The parties can specify where the arbitration takes place. However, the parties must have a connection to the place where the arbitration will take place and it must be fair to the employee; otherwise, there is a risk that the arbitration agreement will be unenforceable. Therefore, it is advisable to identify the location of the arbitration as the municipality, county, or area where the individual last worked, even if the employee no longer lives in that area.
Question: Can I require that employees be deposed and that the parties engage in discovery prior to an arbitration hearing?
Answer: Yes, you can include language in your arbitration agreement that allows both parties to engage in discovery. However, discovery must be even-handed and not one-sided. Therefore, if you want the employer to be able to take 5 deposition, the employee must be able to take up to 5 depositions.
Question: Can I limit the damages that an employee can receive in arbitration?
Answer: No, the employee must be able to receive in arbitration the same damages that he or she could recover in court, including punitive damages, civil fines, liquidated damages, and attorneys’ fees. If the arbitration agreement prevents an employee from recovering all damages that he or she can recover in court, it is likely that if challenged, a court would invalidate the arbitration agreement.
Question: Can I narrow the statute of limitations for employees to bring claims? For example, can I require that employees bring claims within 6 months after their employment ends?
Answer: No. For any claim brought in arbitration, the statute of limitations must be the same as it would be in court; otherwise, it is likely that, if challenged, a court would find the arbitration agreement to be unenforceable.
Question: Can I require employees to bring claims against me in arbitration, but allow me to sue employees in court?
Answer: No. Generally, the agreement to arbitrate must be mutual.
Question: Can I prevent individuals from bringing class or collective actions in arbitration?
Answer: Yes. Earlier this month, the United States Supreme Court held that employers can mandate that individuals bring claims in arbitration on behalf of only themselves and that an employer can prohibit class or collective action arbitrations.
Epic Systems Corp. - Recent U.S. Supreme Court Case law
Question: What was the recent Supreme Court case concerning arbitration all about?
Answer: The recent Supreme Court case was Epic Systems Corp. v. Lewis, which addressed the interplay between the FAA and the National Labor Relations Act (“NLRA”). Under the NLRA, the National Labor Relations Board (“Board”) stated that employees have the right to file class actions against their employers; therefore, according to the Board, arbitration agreements that prevent class action of any kind, whether in arbitration or in court, violated the NLRA. After the Board invalidated a number of arbitration agreements containing class action waivers, employers appealed. Some court agreed with the Board. Other courts disagreed stating that the FAA permits arbitration agreements to contain class action waivers and the NLRA does not trump the FAA; therefore, such agreements are valid. The Supreme Court was asked to decide the conflict among the courts.
Question: What did the Supreme Court determine in Epic Systems?
Answer: The Supreme Court held that the right to pursue a claim as a class action is a procedural not a substantive right. Therefore, it would not violate the NLRA for employers to require their employees to sign agreements requiring that they arbitrate all claims and that they arbitrate such claims individually, rather than as a class or collective action.
Question: I don’t have arbitration agreements with my employees, so what is the impact of Epic Systems on my business?
Answer: If you do not have an arbitration agreement with your employees, then Epic System is of no import; employee can pursue claims in court on an individual or class basis.
Question: I have arbitration agreements with my employees but it does not discuss class actions, what should I do?
Answer: If you want to have your employees arbitrate their claims on an individual basis, rather than as a class, you should consult with counsel and determine whether it is appropriate to revise your arbitration agreements to specifically prohibit class actions.
Question: My arbitration agreement states that it will follow the rules of AAA or JAMS, do I need to revise the agreements to prohibit class actions in light of Epic Systems?
Answer: Some of the arbitration rules for AAA or JAMS permit class actions. Therefore, you should consult with counsel and determine whether it is appropriate to revise your arbitration agreements to specifically prohibit class actions.
Requiring Employees to Arbitrate their Claims
Question: How can I require employees to arbitrate their claims against the employer or its owners?
Answer: You must have employees sign an arbitration agreement, which should be drafted with the input of counsel. If you want the arbitration to occur on an individual basis only, then, among other things, the arbitration agreement should include an explicit provision requiring claims to be arbitrated on an individual basis.
Question: Do I have to pay anything to employees in order to have them sign arbitration agreements (sometimes known as “consideration”)?
Answer: Technically, no, you do not need to give employees a separate payment in order to have an enforceable arbitration agreement. For a new business or new hires, this is easy as the arbitration agreement may be part of the new hire paperwork. For current employees, it may be more complicated. If you are prepared to terminate the employment of every current employee who does not sign the arbitration agreement, then you do not need to pay them anything further. If you are not prepared to terminate current employees, then current employees might need an incentive to sign arbitration agreements, such as a bonus or other incentive payment.
Question: Can I have some employees sign arbitration agreements and other not? For example, could I have all hourly employees sign arbitration agreements but not managers?
Answer: Yes, although you should consult with counsel about the reasons why a group of employees is not required to sign arbitration agreements.
What Are the Pros and Cons of Arbitration?
Question: What are the benefits of arbitration?
Answer: Some of the benefits include:
- Quicker resolution of claims
- Ability to address issues on an individual rather than class basis
- Confidentiality and privacy of process
- Settlement agreements do not need court approval
- Usually cheaper than pursuing a case in court through trial
Question: What are the problems with arbitration?
Answer: Some problems with arbitration include:
- Becoming more and more expensive to take a case to a hearing
- Inability to use motions to get case dismissed prior to trial
- Might have to litigate the same case over and over
- Ruling in one arbitration could impact other arbitrations
- Arbitration can be expensive especially if the claim is frivolous on its face
- Limited ability to appeal an arbitrator’s decision
Carolyn D. Richmond
Chair, Hospitality Practice
Glenn S. Grindlinger
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