HR Magazine: Order in the Hearing

Vol. 46, No. 7

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Employers have the right to require mandatory arbitration, but how can they do so without provoking an uproar from employees?

It's inevitable: Conflicts arise at work. And when they do, it's up to human resource professionals to possess the wisdom, patience and fairness to nip these fights in the bud and get employees to move on. If left unchecked, on-the-job disagreements easily can result in bad feelings, high turnover and costly litigation.

One method to help bury the hatchet: a well-designed alternative dispute resolution (ADR) program. ADR programs typically begin with informal discussions, then move on to mediation and other techniques; formal arbitration is considered a last resort. The most difficult disputes usually end up in arbitration, which generally is faster and less expensive than litigation. What's more, employers can force workers to use this form of dispute resolution instead of suing, according to the courts. (In other words, employers may compel individuals to sign arbitration agreements as a condition of new or continued employment.)

In March, the U.S. Supreme Court reinforced an employer's right to require mandatory arbitration of its workers. The court ruled that a former employee of Circuit City Stores Inc. could not sue the company for harassment because he had signed an employment agreement requiring him to arbitrate such claims. (For more information, see "The Facts of the Case.")

As a practical matter, the Supreme Court ruling strengthens employers' hands and may encourage companies to create and use arbitration programs, lawyers say.

But trial lawyers aren't happy with the court decision—or with the way the process works in general. And those negative reactions to arbitration—especially mandatory arbitration-may counteract some of the benefits employers hope to gain.

And therein lies the rub: Arbitration is supposed to be less adversarial than litigation. But how can employers truly take maximum advantage of this system if—by forcing employees to submit to the process—they generate the very negative and adversarial reactions they had hoped to avoid?

To start, it helps to understand some of the concerns that employees and legal experts express about arbitration.

Skewed Toward Employers

"I think it's too employer-friendly," says John Vale, senior counsel for constitutional litigation at the Association of Trial Lawyers of America in Washington, D.C. Arbitration agreements are meant to be voluntary and mutual, but in practice, they often are contained in the fine print of job applications—"the kind of agreement nobody reads," Vale says. "It's not too voluntary if you're forced to sign an agreement [to get a job]," adds plaintiff's attorney Wayne Outten, a partner in New York law firm Outten Golden L.L.P.

To be sure, there are some protections in place for employees. While mandatory arbitration agreements generally are enforceable, some states limit how far they can go. Under California law, for example, employers can't force workers to pay arbitration costs that would exceed court costs; nor can employers limit employee discovery.

"A contract can't be so one-sided that it's unfair," says John Hansen, a partner in the San Francisco law firm Nossaman, Guthner, Knox & Elliott L.L.P. Courts have struck down arbitration agreements that placed too great a burden on employees, Outten adds.

But even with these protections, employers can take advantage of other opportunities to gain the upper hand in arbitration, trial lawyers say. High fees can discourage employees from proceeding. Punitive damages may be capped. Employers are more likely than employees to know arbitrators who may favor them.

To avoid legal complications, experts advise having an employment attorney review arbitration agreements to make sure they are up to legal snuff. "From an HR perspective, the best way to implement a program that avoids legal problems is to implement one that is clean and neat and fair," says Robert J. Gregory, a senior attorney for the U.S. Equal Employment Opportunity Commission (EEOC).

But the difference between fair and unfair isn't obvious. For example, should an arbitration program be mandatory or voluntary? In the ADR community, this is a controversial issue.

While a mandatory program prevents litigation that can produce negative headlines and big legal bills, workers may view it with suspicion, says Bob Meade, senior vice president of the New York-based American Arbitration Association (AAA). Conversely, a voluntary program opens a company up to lawsuits, which are rare if ADR is available.

Many in the arbitration business, including the National Academy of Arbitrators, favor a voluntary system because it gives employees the option of resolving disputes out of court without depriving them of their constitutional right to a trial by jury.

"My objection [to mandatory arbitration] is [that] it is crammed down employees' throats. That's unfair," says Arnold M. Zack, a Boston arbitrator and author of several books on resolving labor disputes.

Still, many companies use mandatory arbitration without repercussions. Employment attorney John E. Lyncheski, of the Pittsburgh law firm Cohen & Grigsby P.C., says that, if properly designed, a mandatory program ensures a fair hearing, decision and remedy—just like court, except faster.

“Choose what suits your culture,” advises Meade of the AAA. Although most firms use mandatory programs, some do not.

The ADR program at Halliburton Co., a Dallas-based energy services company, has been a model for other employers; Halliburton requires its 50,000 U.S. employees to use ADR to resolve disputes. Of the 5,000 cases brought since the program began in 1993, only 100 to 150 cases—most involving former employees who alleged discrimination and wrongful termination—have gone to formal arbitration, says William L. Bedman, assistant general counsel. The rest were resolved through other ADR options, including informal “open door” discussions, internal conferences and mediation.

The program, which is run jointly by Halliburton’s HR and legal departments, has received “a relatively high acceptance rate” in employee surveys, Bedman says. Its mandatory nature has been “a non-issue from an employee relations standpoint,” he added.

Halliburton’s litigation expenses declined about 80 percent during the ADR program’s first couple of years, Bedman says. He has no recent statistics.

At TRW Inc., the company’s mandatory arbitration program gives employees who lose an arbitration the chance to go to court. But the opportunity is used rarely, says HR Director Shelly Peet. Of the 100-plus cases handled since 1995, about 12 have gone to arbitration and three have gone to court. At least three-fourths of all cases were resolved in mediation. The program applies to 39,000 U.S. workers.

Unlike most employers, the Cleveland-based auto-parts and aerospace company decided to make arbitrators’ decisions binding on the company but not employees. Despite the risk of litigation, TRW wanted arbitration to be “a process the employee feels comfortable going through,” Peet said.

Arbitration in Practice

For HR, the key to successful arbitration, and ADR generally, is designing a fair program that employees will perceive as a helpful tool for resolving disputes—not as a corporate weapon for crushing troublemakers.

“Do it right or don’t do it at all,” advises Lyncheski. “That means having a comprehensive policy that addresses all of the issues.”

Bear in mind that no one ADR program is right for all employers. A good program “will be custom-tailored to suit the needs of the employer and its employees, consistent with the current state of the law and the organization’s corporate culture,” says the AAA’s web site.

To determine if a particular program matches up well with their corporate culture, some employers appoint committees from HR, legal and other departments to design an ADR program. Some employers set up focus groups to solicit employee input, and many run a pilot program at certain locations before rolling it out companywide.

As for design considerations, the National Academy of Arbitrators calls for a fair method of choosing an arbitrator, adequate representation of the parties, a reasonable time and place for a hearing, fair compensation arrangements, adequate discovery and a written opinion and award. A deadline for submitting claims also is common.

Here are some nuts-and-bolts design recommendations from ADR experts:

• Choosing an arbitrator. It’s crucial that both sides see their arbitrator as neutral and fair. A number of national organizations provide trained arbitrators who specialize in employment disputes. State and local services also exist. Arbitrators may be former judges, employment attorneys (management and plaintiff) and HR professionals. About 5,000 labor arbitrators are working in the United States, according to the National Academy of Arbitrators.

One common method for picking an arbitrator is to have a pre-arranged panel consisting of an odd number of candidates. When a dispute arises, both sides have a chance to strike names from the list until one agreed-upon name survives. Alternately, one side can pick an arbitrator and ask if it’s acceptable to the other side. Or each side can rank candidates in order of preference and try to match their lists.

Usually, one arbitrator is chosen to hear a case.

A panel of three arbitrators can hear large, complex cases if the parties agree.

• Paying an arbitrator. Arbitration may cost less than going to court, but it isn’t cheap. Costs vary by region, but arbitrators generally charge $2,000 to $3,000 per day. Some charge by the hour. A typical arbitration lasts one to four days and can cost thousands of dollars.

In addition, arbitration services have filing fees—the AAA’s fee starts at $500 and rises, depending on the size of the claim. Other costs can be incurred for space rental, representation and discovery.

A workplace arbitration program shouldn’t force employees to shoulder too much of the cost. Some employers limit workers’ costs to no more than what they’d pay in court, say, a $150 filing fee.

Some employers pay the arbitrator’s entire fee, although many believe workers should chip in something.

TRW charges employees a $100 filing fee to begin arbitration. The fee is refunded if the employee wins the case and accepts the arbitrator’s decision as final and binding. Halliburton employees pay $50.

• Where to arbitrate. A neutral location, such as a hotel conference room or an arbitrator’s office, is best. The AAA maintains offices in 38 cities; its arbitrators will travel to other locations.
• Representation. Getting a lawyer isn’t necessary to arbitrate, although it’s advisable for large or complex cases, such as those involving discrimination claims. A good arbitration program will give employees the right to hire a lawyer. Often, if one side uses a lawyer, the other does, too; that’s the case at Halliburton.

Guidelines agreed to in 1995 by the major arbitration services recommend that employers reimburse employees for a portion of their attorney’s fees.

• Relief. Generally, arbitrators can grant whatever relief would be available to the parties in court, including compensatory and punitive damages, back pay and reinstatement. The arbitrator’s written opinion should include a summary of the dispute; damages and/or other relief requested and granted; and a statement about the disposition of any statutory claim.

Whatever ADR and arbitration designs you choose, document the procedures and rules in detail and distribute them in a brochure to all employees. Announce a new program in newsletters and meetings. References also can be included in employee handbooks, benefits packages and employment forms. And don’t forget to have trained HR staff available to answer any questions.

Conclusion

If done correctly, experts say, a corporate arbitration program can produce many benefits. Employers resolve complaints more quickly and cut down on legal costs. Employees have somewhere and someone to turn to when problems arise and, as a result, may stay on the job rather than quit.

Carolyn Hirschman is a business writer based in Rockville, Md. She has written for a variety of business publications and has covered workplace issues since 1991.