Employment litigation is big business in California. Tens of thousands of claims are filed against employers in this state each year. Regardless of political developments on the local, state or national front, this landscape will not change. California’s complex Labor Code inevitably expands each year — with the addition of yet more complex obligations, and new potential claims.
Because employment-based claims are nearly inevitable in California, numerous businesses have adopted arbitration agreements — hoping that by compelling employees to resolve disputes through private arbitration, rather than in court, they will discourage and ultimately avoid lengthy and expensive court battles.
But as businesses as disparate as Uber Technologies, Inc. and J.C. Penney have discovered, arbitration agreements — however carefully crafted — do not stop litigation at the courthouse steps. Rather, the arbitration agreements themselves are frequently challenged in court and enforcing them can be a costly and/or futile exercise. Despite these difficulties, do arbitration agreements still offer any meaningful advantages to employers?
Arbitration Agreements with Clear Objectives, Properly Drafted … Yes
The answer is yes, although it may depend on an employer’s ultimate objectives. For many employers, regardless of the costs of enforcement, arbitration agreements are essential because they can, when properly drafted, discourage and even bar employees from attempting to fashion an individual dispute into a class action. Avoiding class actions has become increasingly important in this state as class action filings increase each year, with class action attorneys constantly searching for new potential targets. Although class actions can be an efficient means of resolving common claims, and were designed to benefit the courts and parties alike, class action procedures are often abused. Even absent evidence of wrongdoing, litigants can file a class action merely to threaten ruinous discovery and damages. No court approval is required prior to filing class-based claims. Defending against an action with class claims becomes a massively labor-intensive and expensive exercise as a company’s entire personnel and compensation records may be subject to review.
Not all arbitration agreements, of course, limit or preclude class litigation. In order to secure that provision, the arbitration agreement itself must expressly state that the employee or job applicant is voluntarily waiving his or her right to court and agreeing that when he or she arbitrates, she will do so in an individual capacity only, and not in a representative capacity. Although the National Labor Relations Board (NLRB) has attempted to circumvent such waivers by claiming they interfere with employee rights to organize the workplace and improve working conditions, many courts disagree and will enforce them. In fact, the United States Supreme Court has ruled that California cannot completely ban class action waivers because doing so would conflict with federal laws supporting private arbitration.
Practical Benefits … Discouragement, Privacy, Cost
Another practical consideration when determining the adoption of arbitration agreements with or without class action waivers is that they can serve to discourage certain law firms and attorneys who simply do not want to take on the legal complexities of defeating arbitration. The time involved in determining whether the agreement is valid, and whether class claims are truly barred, will inevitably discourage the initiation of some class-based claims.
Another consideration for many employers is privacy. Arbitrations are private, and the records, hearings and ultimate findings are not released to the public. The absence of publicity can discourage claimants from overreaching and help facilitate a reasonable settlement.
Of course, cost is a factor for most employers. Arbitration can be less expensive because the arbitrator can schedule proceedings efficiently and avoid unnecessary delays. But arbitrators themselves must be paid, and those costs can add up quickly — several thousand dollars for a full day hearing, as well as administrative charges on top of that.
What to Do
If a decision is ultimately made to adopt an arbitration policy, invest the time and effort in doing it right. Buying one off the internet won’t help. Work with your counsel on the language. If you already have an agreement and counsel weren’t involved, consider a professional review.
Keep in mind that the agreement as a whole must be fair. Courts will not enforce an agreement to arbitrate unless it incorporates certain terms designed to protect employees. The agreement must be mutual — meaning that it must bind both the employer and the employee. The agreement cannot require the employee to pay any more than he or she would pay if the matter were resolved in court (meaning that the employer must absorb the cost of the arbitrator). The agreement must provide for reasonable discovery. Where statutory rights are at issue, it must provide for the same remedies and damages available in court. It should also provide for a written opinion, with a description of the arbitrator’s findings and conclusion.
In conclusion, arbitration agreements are increasingly valuable when properly used, helping employers to survive and overcome California’s litigious environment. They will not defeat litigation altogether, and they certainly will not insulate an employer who deliberately runs afoul of California’s employment laws. But they can help increase an employer’s odds when combating the all-too-common boilerplate class actions that are plaguing California employers.