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Mandatory arbitration agreements won’t always save you money

by on
in Discrimination and Harassment,Employment Law,Human Resources

For the past 45 years, employers have sought alternatives to litigating employee disputes in court. Civil court cases can cost employers large amounts of time and money to resolve, and the possibility of huge “runaway jury” awards raises the risks substantially.

Increasingly, employers have embraced arbitration as a way to curb these costs. That’s why more employers now require arbitration of employee claims as a condition of employment. But before you have all employees sign arbitration agreements, be sure to consider all the costs. You may find that arbitration isn’t the cost-effective strategy you think it is.

How arbitration works

The Michigan Arbitration Act (MAA) provides for statutory arbitration and requires arbitration agreements to provide for entry of judgment by a circuit court after the arbitration award is issued. If not, arbitration agreements are construed to provide for common-law arbitration. In that case, either party can unilaterally revoke the arbitration agreement at any time before announcement of an arbitration award.

The MAA applies to any written contractual agreement (except for collective bargaining agreements) to arbitrate employment-related disputes providing for entry of a circuit court judgment. To validly encompass statutory employment discrimination claims, the arbitration agreement must meet four requirements:

  1. A valid agreement to arbitrate
  2. No statute precluding arbitration
  3. No waiver of substantive rights and remedies
  4. Fair arbitration procedures.

Finally—and crucially—employees may not be required to pay either unreasonable costs or any of the arbitrator’s fees or expenses as a condition of access to the arbitration forum. 

Arbitration rules & procedures

The American Arbitration Association (AAA) rules and procedures for employment arbitrations—Employment Arbitration Rules and Mediation Procedures, Amended and Effective July 1, 2006 (EARMP)—are a generally recognized standard to ensure validity of the arbitration process.

AAA formally adopted its rules and procedures in 1996, embracing a nationally approved due process protocol to ensure that all AAA-administered employment arbitrations would meet the four requirements for the enforceable resolution of statutory employment discrimination claims. Employer-mandated arbitration agreements routinely refer to the EARMP for compliance with MAA and other Michigan state laws.

The “fairness prong” for arbitration of statutory employment discrimination claims requires affordable access to the arbitration process for all employees.

The high cost of arbitration

Thus, AAA rules require the employer to pay all administrative fees in excess of the initial $150 filing fee (the typical circuit court filing fee).

That’s just the beginning of the substantial arbitration bill employers have to pay. They pay the arbitrator’s entire compensation, easily bringing the cost of a full-day arbitration hearing to more than $10,000. The table (see box below) shows how the costs break down.

These costs do not include any additional arbitrator’s fees for considering and ruling on motions, the arbitration panels sometimes preferred in more complex cases, court reporter fees and hearing transcription costs or more extensive hearing time. The employer pays all of these.

Also not included are attorneys’ fees and other expenses the employer would incur even if courts instead of an arbitrator resolved the matter.

In some cases, going to court will be considerably less expensive than arbitration. The filing fee for motions is just $20 in state courts. The mandatory case evaluation fee is $75 in state courts (and free in federal courts).

Since the administrative cost of arbitration for employers far outweighs the administrative costs of judicially resolved disputes, employers should carefully evaluate whether an “expeditious” arbitration proceeding is also “inexpensive.”

Here are questions to ask when weighing whether arbitration and mandatory arbitration agreements are worth pursuing:

  • What is the risk of a “runaway” jury verdict?
  • Is limited and expeditious discovery important?
  • Is final resolution of a claim in less than a year (versus two to three years for a civil case) important?
  • Is the absence of appellate review in arbitration desirable?

Many employers still look favorably upon mandatory arbitration, but it is not for everybody. Arbitration may or may not be less expensive. The likelihood of a “runaway” verdict is less likely in arbitration, but employers give up the right to appeal legal issues that arbitrators may not consider important when they dispense their own brand of industrial justice.

 

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