Employers Can Just About Bank on Winning in Arbitration

Ellen J. Dannin is a professor of law at California Western School of Law and the author of many works on labor and employment law

Tired of worrying whether some over-zealous police officer will nail you for going over the speed limit? Stop worrying. Just write up a contract with the traffic authorities that exempts you from the law. No more fines. No more rules. And, best of all, you can force them to agree to it.

Just think of all the pesky laws you and I would be happier without. Want the Internal Revenue Service off your back? Write up a contract taking yourself out of its jurisdiction.

“Wait a minute,” you say. “This is just too good to be true. What’s the catch?”

The catch is that you can only do this if you are an employer. A good place to see how this works would be to look at the case of Circuit City vs. Adams, which was argued last month before the U.S. Supreme Court, and how it works in many of America’s workplaces. Saint Clair Adams, a salesman, alleged he was a victim of sexual harassment and discrimination because he is gay.

Circuit City Stores Inc. requires all job applicants to sign a form agreeing to resolve all work claims by binding arbitration. “All disputes” means what it says. In cases of sexual harassment, age, racial or religious discrimination, or whistle-blowers, the agreement bars all of them from being heard in court.


If you refuse to sign, the application will not be considered. And in some states, an employee can be fired for refusing to sign.

Even if an employee gets no choice, is there anything wrong with arbitration? The answer is “no” in many cases, but “yes” in these employment cases. The way “pre-dispute arbitration agreements” work is unfair.

Circuit City, for example, wrote a contract that said the employee, Adams, was bound to arbitration, but the company was not. The contract rewrote the law to cap any award Adams could receive at a rate far below what he was entitled to if the same claim had been tried in a court. It placed a one-year statute of limitations on all claims, even claims with longer limits.

It required that Adams pay half the arbitration’s cost, including the arbitrator’s salary and expenses (in a court case, Adams would not have had to pay half a judge’s salary). The employer would know that this requirement alone meant that most employees could not afford to arbitrate and that the employer could get away with violating the employee’s rights.

This is only one of many problems with forcing employees into arbitration (which does not have many of the safeguards of trials). There is no right to a jury, no “discovery” and no rules of evidence.

Although juries have been attacked--such as for the McDonald’s coffee case in which a woman was awarded $2.7 million for burns she suffered when her coffee spilled into her lap, burns that required painful operations--all credible studies show that juries tend to make good decisions. When people learn the facts of the McDonald’s case, rather than the way it was portrayed, they agreed with the jury award.

Discovery, which requires parties in a case to share information, is vital in getting information needed to try a case. The employer already has the information, because of employment records. Without discovery, the employee goes into arbitration blind, which puts the employee at a disadvantage. The rules of evidence do not exist only to make law students’ lives miserable. They provide a powerful guide for the decision-making process by making it clear that some evidence, such as hearsay, is not as trustworthy as other kinds of evidence.

Most important of all in arbitration, there is no judge. Having a judge preside over a case instead of an arbitrator provides the litigants with a fairer forum. Judges get paid no matter how they rule in a particular case. This makes it easier for them to be impartial. But the arbitrator’s income may be affected by how he or she decides each case.

Arbitrators are hired by private parties. They know that whether they get picked to work in the next case may depend on how their current case is decided. They also know that most employees will only be involved in one case, but the odds are that an employer will be involved in others.

In addition, repeat players in lawsuits--and employers are more likely to be repeat players than are employees--get better at handling the next case.

Does this make a difference? Yes. Employers are far more likely to win when they have arbitrated a case before, according to research by professor Lisa B. Bingham of Indiana University. When an employer is in arbitration for the first time, the employee wins 70% of the time. When the employer is a repeat player--that is, when it has arbitrated at least once before, the employee wins only 16% of the time. Bingham also found that the amount an employee recovers drops dramatically at the same time.

Bingham also found that when the employer has handled a case with the same arbitrator, the employer’s odds of winning double.

This problem is exacerbated, because arbitrators are often not required to give written explanations justifying their decisions, making it impossible to know why they ruled the way they did. In addition, arbitrations are private. Although the employee may not be concerned by this, the rest of us should be. Trials, on the other hand, are open to public scrutiny.

If all of this is not enough to tip the balance in their favor, employers have been endlessly creative in drafting arbitration processes that favor them. For example, some agreements designate the employer’s director of human resources as the arbitrator.

The unfairness of pre-dispute arbitration agreements does not end there. The courts have interpreted the law to give arbitrators--"Rent-a-Judges"--more power than federal judges. Pre-dispute arbitration agreements usually state that arbitration awards are final and binding, meaning they can virtually never be set aside. Contrast this with the treatment given to a judge. A Title VII civil-rights case tried by a federal judge can be reversed if there is no substantial evidence in support of the outcome. The same decision by an arbitrator would stand. That’s the case even though many arbitrators lack the experience and knowledge of judges.

Most people who exempt themselves from the law are called criminals and end up behind bars. But when an employer does the same thing, it’s considered good business.

When you put all of this together it creates a situation ripe for abuse. An employer who did not take advantage of this would be considered incompetent or a saint.

What’s the solution? Unfortunately, Circuit City vs. Adams raises only a technical point that can do nothing to get at these abuses. The California Supreme Court recently recognized it was time to put an end to this lawlessness and imposed strict guidelines that will strike down many pre-dispute arbitration agreements. These standards will also make them less attractive, because the court requires that employees not be made worse off by having their claims arbitrated than they would be by going to court. Other states should do the same. *