Binding Arbitration For Employment Disputes - Boon or Bane?

In today’s perceived litigious society, many employers believe that it is imperative to avoid the courts with respect to claims brought by an employee(s). Consequently, it is very common for employers to require employees to sign a mandatory arbitration agreement as a condition of employment. While those agreements drafted to meet the relevant legal requirements are routinely enforced, it is imperative employers fully understand the implications of requiring binding arbitration to resolve employment disputes.

In California, the courts require employers to pay for all of the costs unique to arbitration. The primary and most significant cost is the arbitrator’s services. The arbitrator’s cost can easily exceed $10,000.00 in even the simplest of cases – a cost the employer is required to shoulder without any contribution from the employee. Thus, the true cost to an employer, even in case in which it prevails, can be, and generally is, more substantial in arbitration compared to court.

Furthermore, the ability to appeal an unfavorable arbitrator’s decision is substantially limited compared to a jury verdict. An employer can seek reversal on appeal of a jury verdict based on a mistake of law and/or fact. However, in general, an arbitrator’s decision cannot be overturned on appeal even if the arbitrator made a factual and/or legal mistake. The ability to obtain reversal of an unfavorable arbitrator’s decision is far more difficult than a judgment following a verdict by a jury or judge.

An alternative to binding arbitration does exist which will avoid a jury – a court or bench trial. This alternative simply has the judge, as opposed to a jury, decide the case. This alternative eliminates the arbitrator’s costs the employer must pay, and provides the same rights of appeal as applicable to a jury verdict. One of the differences between arbitration and a bench trial is that both parties have more flexibility in selecting an arbitrator whereas the ability to “select” a judge is limited to the legally recognized reasons to challenge a judge.

Overall, before requiring binding arbitration to resolve disputes with its employees (current and former), an employer is cautioned to make sure it understands the pros and cons of arbitration compared to other options available to resolve legal problems that arise with current or former employees.