Should Employers Reconsider Using Mandatory Arbitration Provisions in Employment Agreements?

By Jason Shinn on January 19, 2016Posted in Employment Agreements

The Wall Street Journal recently ran an editorial titled, “Why the Trial Bar and Its Friends Detest Arbitration” by James R. Copland. Mr. Copland’s editorial highlighted some high-profile lawsuits to conclude that the court system often fails companies. Business owners frequently share the same belief and assume their businesses will fare better in arbitration rather than going through the courts. But is this a correct assumption?

As with many issues in life, it depends. But based on our experience, we more often than not recommend our small and medium-sized business clients to forego arbitration and rely on the courts for resolving disputes. Here are a few considerations for why we make this recommendation:

Cost of Litigation Versus Arbitration

Arbitration proceedings require the parties to pay the arbitrators’ fees and often other administrative expenses. In contrast, in a court proceeding, no one is paying the judge assigned to the case. Instead, using courts often only requires the paying of a filing fee to initiate the lawsuit and nominal fees for motions that may be filed.

Additionally, arbitration proceedings often have an escalating fee schedule, which is not always equally shared by the parties. For example, the American Arbitration Association’s fee schedule for employer arbitration plans provides that:

In cases before a single arbitrator, a non-refundable filing fee capped in the amount of $200 is payable in full by the employee when a claim is filed, unless the plan provides that the employee pay less. A non-refundable fee in the amount of $1,500 is payable in full by the employer, unless the plan provides that the employer pay more.

To put this fee schedule in perspective, the filing fee and jury fee for a lawsuit filed in a Michigan Circuit Court is only $235 and the defendant is not required to pay any fees to respond to the lawsuit or even to file a counter-claim in that lawsuit.

Accordingly, any company considering arbitration for handling employment claims should carefully consider the out-of-the-box cost for such a program.

Length of Time to Obtain a Resolution

Arbitration is often assumed to be a quicker process for resolving disputes. Historically, this was probably a correct assumption. However, especially here in Michigan with the implementation of Business Courts, we have seen the length of time to close a case drop significantly. For example, we recently represented a client in a pregnancy discrimination lawsuit that involved an arbitration provision. Arbitration was filed for on November 5, 2014, but the arbitration hearing did not take place until December 2015.

For example, we recently represented a client in a pregnancy discrimination lawsuit that required arbitration. Arbitration was filed for on November 5, 2014, but the arbitration hearing did not take place until December 2015.

In contrast, we have had many business court cases that have resolved within 6 to 7 months. Admittedly, many of these cases are non-compete disputes that are often on a fast-track because preliminary injunction issues are handled early on in the litigation and often dictate how a case resolves.

But even so, our experience appears to be consistent with that of other cases filed in Michigan business courts, which are reported to close within an average of approximately 5 to 7 months.

Conclusion

Before assuming arbitration is the best option for your company, it is worth testing this assumption against recent data. This is especially true in light of innovations like the business court docket Michigan now uses.

For more information about improving your contracts and employment agreements, limiting employment law risks, as well as proactively managing employment law claims, contact attorney Jason Shinn.

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