14 May 2012 Jay Shepherd

Why arbitration sucks — even for employers

In the wake of Major League Baseball’s firing of longtime arbitrator Shyam Das after he ruled against it in the Ryan Braun case, I thought it might be a good idea to examine why this fashionable alternative-dispute-resolution mechanism is deeply flawed.

Arbitration has long been the norm in labor cases (that is, cases between unions and management). And baseball arbitration is of the labor-law variety. But increasingly, nonunionized employers are choosing to subject themselves and their employees to arbitration. Which is dumb.

“Why?” you may ask. I’m glad you asked. Here is my jeremiad on arbitration, from Chapter 12 of Firing at Will: A Manager’s Guide:


Arbitration is much less common in employment cases, and usually only happens when there is a preexisting contract providing for it if there is a dispute. In other words, the employee would have signed an agreement — often at the start of employment — waiving his rights to go to court or an agency and instead having the dispute resolved by an arbitrator.

The arbitrator is chosen by both sides from a list of potential neutrals. In effect, he acts like a judge. Unlike a mediator, his job is to make a decision at the end of the case.

Many employers and management lawyers think it’s a good idea to have mandatory-arbitration clauses in employment agreements. They think arbitration is a good idea because it tends to be cheaper and faster than the agency-and-court system. They believe that arbitration ends up favoring the employer.

But they are wrong.

Arbitration is a terrible idea, for four reasons. First, the less-formal approach to litigating the case, dispensing with the evidentiary rules, means that the employee can bring in evidence that never would have seen the light of day in court. As I said before, rules of evidence are a good thing if you have a lawyer who understands them. Ignoring the rules turns the case into a free-for-all.

Second, there is no precedent in arbitration. In the court system, the judge generally has to abide by past decisions of earlier court cases, especially higher-level courts. Our legal system is based on the authority of precedent. But in arbitrations, there’s no such thing. Yes, lawyers can cite to past arbitration cases for examples of what arbitrators have done in similar cases. But the arbitrator is free to ignore it.

Third, there is almost no ability to appeal a bad decision. I don’t want to overstate this. While you can almost always appeal a bad decision at an agency or in a court, appeals typically have little chance of success. But it’s even worse in the arbitration world. Yes, you can file the equivalent of an appeal in court to prevent the enforcement of an arbitration award. But you shouldn’t bother: there’s next to no chance of it succeeding.

My final reason is the most important (and why arbitrators want to smack me in the nose). Remember how I said a few paragraphs ago that arbitrators are chosen by the parties? That’s the whole problem. If an arbitrator doesn’t get chosen for cases, he can’t make money. And if he gets a reputation as being too pro-employer, plaintiffs’ lawyers will stop agreeing to use him. (Likewise, if he gets a pro-employee reputation, management lawyers will stay away.) Trust me: this happens. At our firm, we had a list of arbitrators that we would never use because we felt that they were too likely to side with the employee.

In court cases, judges are assigned, not chosen. So the judge needn’t worry about acquiring a reputation of favoring one side or the other. But an arbitrator has some pressure to avoid that sort of reputation. This pressure naturally moves an arbitrator to try to come up fairly even-steven over time, with a rough balance of wins for both employers and employees. Sounds fair, right?

Wrong.

Coming out more or less fifty-fifty sounds like it evenly benefits both employers and employees, but in fact it drastically favors employees. Why? Because employees don’t win half of the cases filed. At the various antidiscrimination agencies, the percentage of cases where probable cause is found tends to run in the 5- to 15-percent range. (There are no reliable figures from court cases.) There are a number of reasons for these relatively low success rates.

For example, discrimination claims are inherently difficult to prove; it’s hard to get inside a manager’s head and find a discriminatory bias. Also, many cases are merely disgruntled employees’ weapons of last resort. Many fired employees bring their cases because of anger instead of an honest belief of having suffered discrimination. So a low success rate is to be expected. That’s why a success rate approaching 50 percent, which is more typical with arbitrators, dramatically favors employees.

So if your employment lawyer tries to talk you into arbitration agreements, ask her if she’s thought about these points.


To order your own copy of Firing at Will, which is a wicked-good idea if your ever have to deal with employees, click any of the following links:

To read Chapter 1 for free, click the link at the top of the page.

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Comment (1)

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