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Dec 9, 2021

Imagine you are trying to hire for a critical managerial position at your company. You’ve found the perfect candidate, and they’re experienced and very savvy about the employment process, so they ask to see your employment agreement so they can run it by their attorney. 

The candidate then comes back with a horde of questions and redlines and, in particular, queries about what happens if the employment relationship goes south. What happens if there are legal disputes about compensation, equity, benefits, cause for termination, etc.? 

Even more granular, why did your company choose arbitration instead of court? Is it because you’re hiding something? Do you want to avoid publicity?

As HR managers fully know, employment agreements can be long, arduous documents laden with legal jargon and overly complex grammar. But, in many instances, this is intentional. The harder a document is to read and understand, the less likely the employee is to scrutinize or negotiate its provisions. And while that may be fine as a strategy when no disputes occur, it also inevitably leads to the casual use of the same boilerplate provisions in agreement after agreement without much thought about their impact. 

This may not matter for most of the uneventful uses of the contract, but when it involves the prospect of litigation and heading to court, it can have a much greater impact. 

What we’re specifically talking about here is the dispute-resolution clause included in almost every, if not every, employment agreement. This clause defines the process by which a dispute between an employer and employee will be decided. Typically, it will stipulate whether a dispute goes to a given state or federal court or whether it will go into arbitration/mediation. 

Let’s look at the difference between these options:

  • Courts. This is the traditional forum for litigation. Courts are government entities and all things filed are matters of public record.
  • Arbitration/Mediation. Also known as alternative dispute resolution (ADR), providers are private attorneys that keep all proceedings confidential, even if some of their processes mirror traditional court litigation.

Courts vs Arbitration

The simple answer is habit. It’s a historical practice and a common, taken-for-granted use of boilerplate provisions. In other words, if it isn’t broken, don’t fix it. 

The problem is, when it does break, it might be too late for your general counsel to fix it. If the dispute-resolution clause in your employment agreements isn’t carefully thought through and strategically designed, it can lead to catastrophic results. 

Take wage and hour class actions. Wage and hour litigation (including class actions) is almost always excluded from employment practices liability coverage and can result in years, sometimes decades, of court proceedings with legal fees climbing into eight figures. By contrast, a thoughtfully drafted arbitration clause can clear up a wage and hour dispute in months and keep the issue individualized to the particular employee.

“Arbitration has its time and place and is best suited for when you need discretion and want to avoid messy public fights over sensitive or confidential matters,” explains Derek Zolner, general counsel at Centro. “Employment agreements with top-level managers and executives or agreements among investors or shareholders are great examples of when you want to arbitrate and avoid disputes playing out publicly.”

Does Arbitration Really Favor Employers?

Let’s dispel a few myths here. The fact is, arbitration is a fundamentally fair process that can resolve disputes efficiently and cost effectively — if done correctly. 

The most common attack on arbitration is that employers are able to “hide” the results of disputes because the proceedings are confidential. But the reality is, employees talk — regardless of existing confidentiality provisions. (Nevermind that it can be very difficult to prove the source of the information.) Plus, there’s no reason an employer can’t make the results of an arbitration public. It sits solely in their discretion. 

Which is to say that arbitration clauses themselves are often not the problem, says Lisa Young, general counsel at LendingTree. Rather it’s when companies use arbitration to “shield bad behavior” that problems arise, Young says, adding: 

“The criticism that arbitration agreements deprive consumers of their ability to go to court is unfair. Two parties agreeing to use the superior process of arbitration leads to a better result for both parties. However, when companies use the confidentiality of arbitration clauses to hide bad behavior, that is a fair criticism. That criticism can be addressed by allowing the parties to disclose the results of the arbitration.”

Young also advises that executive management and boards of directors of companies should have processes to review the claims made by employees to ensure that they are aware of patterns of bad behavior, and that companies aren’t using arbitration clauses to keep that behavior from being reviewed. 

A Fair Process for All

In practice, arbitration can be an effective tool for resolving wage and hour claims, harassment claims, discrimination claims, and everything in between. There is a huge benefit to reducing the cost of these proceedings given that insurance policies may not provide coverage of these disputes depending on their exclusions. Moreover, arbitration can significantly expedite the process, meaning that employees don’t have to wait months or years in court for a resolution. 

The key to successful arbitration is designing a process from the start that employees will perceive as being a helpful tool and one that will deliver a fair outcome to all parties. This is where the involvement of an HR manager becomes critical.

HR managers understand implicitly their company’s culture and the unique demographics of its workforce. This input is invaluable when designing a process that is not only legally sound but representative of the company’s values. 

HR can also explain the details of the dispute-resolution clause to new employees, reviewing claims made by workers, and ensuring there is full transparency and communication should a dispute arise. 

Finally, HR plays the most important role in making sure that employees have full faith and trust in the organization. By ensuring that the arbitration process has been included for efficiency and expediency and not to hide bad behavior, HR and talent managers can go a long way toward assuaging employee concerns about arbitration clauses.  

As Kevin Sherlock, general counsel for SpotHero, points out:

“Arbitration can be a fair and efficient process, but transparency is key. Businesses that utilize arbitration solely as a method to obscure or hide bad behavior have issues far beyond the use of arbitration clauses. The reality is that arbitration clauses, if used correctly and communicated out clearly and transparently, can offer a fast, efficient and fair dispute resolution process for both employees and their employers.”

Ultimately, though, all provisions must be thought through carefully and tailored to the needs of the business. A bad actor will be a bad actor regardless of the dispute-resolution clause in their employment agreement. In contrast, a good company with strong values will almost always benefit from choosing arbitration as its dispute resolution forum of choice, as will its employees. 

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