How Binding Arbitration Provisions Can Protect Your Business

Back Commentary Oct 29, 2018 By Port J. Parker

Consider this hypothetical scenario: Two employees are having a chat over morning coffee, and their conversation turns to an incident of workplace sexual harassment involving a manager and one of these employees. The employees are upset about how management handled; they also believe the company is allowing the same manager to now engage in similar harassment involving other employees.

The employee who reported the incident explains she consulted with an attorney who recommended she sue her place of employment, and invite others to join the lawsuit. However, her coworker reminds her that when she was hired, she signed a mandatory agreement with a provision for handling this type of workplace dispute.

While an employee can always file a claim in court, a signed mandatory arbitration clause means that either party can make a motion to the judge to compel arbitration in lieu of proceeding with the court action. So, the employee now has a choice: attempt to resolve her dispute through an informal process, file a claim which will likely result in a motion to compel arbitration, or invoke her right to have a neutral arbitrator decide the claims against the manager and company.

What is a binding arbitration agreement?

Binding arbitration agreements are used by a growing number of California companies to protect themselves and their management. New or existing employees can be required to sign them as a condition to their employment.

Binding arbitration agreements are a form of alternative dispute resolution where a disinterested third party (an arbitrator) conducts a hearing, reviews the evidence and law cited by both sides, and makes a decision that is usually binding (except in extremely narrow circumstances such as the arbitrator having an undisclosed conflict of interest). Since arbitration is supposed to be neutral, many — if not most — arbitration clauses provide for the parties to agree on an arbitrator. Another commonly-seen structure is to have a panel of three arbitrators; each side picks one arbitrator, then have the two selected arbitrators pick the third.

Although less formal than a court trial, arbitration rulings can carry the same effect as a court verdict. Most importantly, the arbitrator controls the discovery and the hearing, and is required to follow certain protocols that can be put in place in advance. Arbitrations generally occur on a shorter timeline and with fewer formalities than classic court litigation, meaning both the business and employee can usually achieve a resolution faster.

An arbitrator can also limit or restrict the dissemination of information exchanged between parties, including sometimes very sensitive or personal information, and can also limit who has access to that information. Arbitration can keep the circumstances surrounding a workplace dispute out of the public record, limit what has to be produced or discovered, and restrict the exchange of sensitive information only to those who need to see it. Arbitration is now used by companies as a preferred alternative for workplace disputes in lieu of lengthy, expensive public lawsuits. While this seems to primarily benefit employers, it can also benefit employees in a situation where there is confidential or sensitive information they would rather not be made public.

Not all claims are arbitrable. You need to consult with an attorney on what can and cannot be arbitrated. Business owners should also consult with an attorney when drafting a mandatory arbitration provision or agreement (to be enforceable, this typically must be in writing). The provisions or agreement usually contain required disclosures, rules and procedures. This an evolving area of law, which means employers should periodically update their agreements to comply with court decisions or recent changes in the law.

Recent developments in arbitration

On May 21, 2018, the U.S. Supreme Court upheld the enforceability of arbitration clauses in its decision in Epic Systems Corp. v. Lewis. In the decision, the Supreme Court held that arbitration agreements providing for individualized proceedings — as in, designed and implemented on a case-by-case basis, as opposed to class, group or collective proceedings — are legally enforceable.

In light of this decision, lawyers, experts and pundits were uncertain of the outlook for a California bill that was introduced three months earlier, AB 3080. The bill was triggered by the recent #MeToo movement, and would have prevented the use of arbitration agreements to resolve employment-related claims by employees against companies, including claims of sexual harassment, discrimination, retaliation and use of confidentiality provisions. Gov. Jerry Brown vetoed the bill in August, citing the U.S. Supreme Court’s recent decisions.

With the U.S. Supreme Court’s recent clarifications and Gov. Brown’s veto of AB 3080, the staying power of arbitration agreements as a mechanic for adjudicating workplace disputes is further strengthened. The devil is in the details, but including properly-tailored binding arbitration provisions in your employment acknowledgments and contracts is an expedient way to protect your business, management and employees.