For more than a few years -- at least since the United States Supreme Court’s seminal 2017 decision in Epic Systems v. Lewis -- employers across the country have weighed whether to have their employees sign arbitration agreements with class and collective action waivers.
While many employers have chosen to do so, many have elected not to.
The reasons for having arbitration agreements with employees are patent – avoiding class and collective actions, as well as avoiding sympathetic juries. And a great many employers can attest to the tremendous value of those agreements in helping them to dismiss class or collective action lawsuits and instead arbitrate claims with a single individual.
Given that value, some are puzzled by the decision not to require arbitration agreements. They often ask the same or similar questions — Why wouldn’t an employer want to use arbitration agreements, particularly if they will foreclose class or collective actions? What are the “cons” of arbitration agreements?
There are “cons” to these agreements — and they are not insignificant.
The following chart of the “pros” and “cons” may be helpful to employers considering whether to implement arbitration agreements, or to those reassessing their prior decisions. (We will refrain from addressing the impact of arbitration agreements upon representative actions under California’s Private Attorneys General Act to avoid a complicated analysis in light of United States Supreme Court and California Supreme Court decisions on the issue.)
| Pros | Cons | |
| Class and collective actions | 1. These types of large-scale actions with great potential exposure should be foreclosed (unless there are issues with contract formation or interpretation, the requisite Federal Arbitration Act (“FAA”) “interstate commerce” is not involved, or the FAA’s transportation exception applies) | 1. The possibility of hundreds or thousands of costly individual arbitrations, particularly in jurisdictions where the employer must pay all of the arbitration fees (the “Door Dash” phenomenon) |
| Jury |
1. Avoiding the unpredictability of a jury 2. Avoiding a decision driven by jury sympathy 3. Avoiding a jury that doesn’t understand the nuances of the laws 4. Avoiding the possibility of the “runaway jury” |
1. Arbitrators can be unpredictable, too 2. Arbitrators can be sympathetic, too 3. Not all arbitrators understand legal nuances, either 4. The possibility of the “runaway arbitrator,” whose award will likely be exceedingly difficult to challenge because of the limited appeal rights (see below) – like the California arbitrator who awarded a plaintiff $4.1 billion in a wrongful termination case |
| Appeal |
1. Limited appeal rights for arbitration decisions mean that a favorable decision will likely be final, such that the employer is likely to avoid additional attorney’s fees and time |
1. Limited appeal rights mean that an unfavorable opinion will likely be final, too |
| Discovery and motions |
1. There could be less discovery and more limited motions practice in arbitration |
1. Depending on the arbitration agreement, the arbitration service and the arbitrator, discovery and motions practice in arbitration could be the same as in court 2. Some arbitrators will not entertain motions for summary judgment 3. Arbitrators have a financial disincentive to grant a motion for summary judgment – if they grant the motion, they will not obtain the fees for a multi-day arbitration hearing |
| Attorney’s Fees and Costs |
1. Attorney’s fees and costs can be less if there is less discovery and motions practice than in court 2. Limited appeal rights mean that appellate fees and costs typically will be avoided |
1. Attorney’s fees can be virtually the same as they would be in court depending on the amount of discovery and motions practice 2. Arbitration costs can be substantial, all for activities that a judge would perform without any additional cost to the employer 3. Arbitrator’s fees for a single-plaintiff case can exceed $100,000 4. There will be fees for all of the arbitrator’s activities, including conferences, reviewing briefs, conducting hearings and issuing orders 5. Employees and their counsel can purposefully drive up fees and costs by taking positions that require the arbitrator to intervene |
| Settlement |
1. The fact that they will not reach a jury could incentivize employees and their counsel to be more reasonable in settlement discussions |
1. The fact that employers will have to incur significant arbitration costs may encourage employees and their counsel to be more unreasonable in settlement discussions (e.g., “You’re going to have to pay the arbitrator $100,000 in any event. You might as well give that to us now and avoid paying more attorney’s fees.”) |
| Employee morale and union organizing effects |
1. None |
1. Mandatory arbitration agreements could create morale issues, which in turn could lead to attrition. 2. Unions may highlight mandatory arbitration agreements in their organizing efforts |
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