Paul Horton: Agreements to Arbitrate Before You Hire an Employee

Most business owners will encounter disputes with employees at least once throughout the life of their organization, often through no fault of their own. Regardless of the nature of the dispute, litigation can be costly and may hurt a company’s image. Arbitration agreements, often included in employment contracts, require both the employer and the employee to settle disputes outside of the court system.

Here are Some Benefits of Arbitration Agreements

Proponents of arbitration for employment-based disputes often point out that juries typically are more sympathetic to employees, even when the facts may otherwise favor the employer. After all, the majority of jurors are not business owners but most identify as employees themselves. Arbitration agreements, therefore, can be seen as a safeguard against frivolous lawsuits or at least a method of ensuring a more level playing field. Specifically, class action lawsuits have the potential to close businesses and derail entire industries.

And since court proceedings are a matter of public record, litigation can result in negative publicity for an employer regardless of whether it did anything wrong. Arbitration affords defendant employers more privacy, since the proceedings are not a matter of public record. This discretion can also play an important role in maintaining key business partnerships.

Furthermore, arbitrators’ decisions are final except in extraordinary circumstances. Unlike litigation, where the costly appeals process often leads to cash settlements, employees unhappy with the results of arbitration generally cannot have the decision reviewed by a higher authority.

Make Sure Your Arbitration Agreement is Legal

The Federal Arbitration Act allows employers to include binding arbitration agreements as a condition of employment. Such agreements usually contain language wherein both parties give up the right to go to court if they are unhappy with the results of an arbitration proceeding.

An arbitration clause may be held invalid if the complainant is able to prove that the employer designated a biased party as the arbitrator. Therefore, these clauses usually designate broadly recognized neutral organizations (such the American Arbitration Association) to broker the process. An arbitration agreement also may be held invalid if it is one-sided and allows the employer to sue in court, according to courts in California and some other states, but that is not the case in federal court.

The following sample arbitration clause comes from the Chartered Institute of Arbitrators:

“Any dispute or difference arising out of or in connection with this contract shall be determined by the appointment of a single arbitrator to be agreed between the parties, or failing agreement within thirty days, after either party has given to the other a written request to concur in the appointment of an arbitrator, by an arbitrator to be appointed by the President or a Vice President of the Chartered Institute of Arbitrators.”

What is Arbitration Like?

Binding arbitration is one form of alternative dispute resolution (ADR), which takes place outside of the state or federal court systems. The process begins when one party files a demand for arbitration with the American Arbitration Association or similar ADR organization. You can also just use a private arbitrator which will save you money. We’ve seen arbitration fees that are in the tens of thousands for a dispute over commercial real estate. The respondent (the party that would be the defendant in a court case) is notified and has a set time to file an answer or counterclaim. The third party then works with both parties to select a neutral arbitrator from its list of available arbitrators, often retired judges.

The arbitration proceedings begin with a preliminary hearing, in which each party has the opportunity to discuss the substantive issues of the case with the arbitrator. Procedures for exchanging information and disclosing witness lists also are discussed at this initial meeting. Then each party exchanges information and agree to evidence and arguments that will be presented in the hearings. Finally, each party presents testimony in a series of hearings and the arbitrator makes a decision.

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