The True Cost of Arbitration in the Workplace

By: Kate Drum

Edited By: Maayan Abouzaglo and Christine Mao

In the past few decades, the usage of mandatory arbitration agreements has become exceedingly prevalent in the workplace. The agreements, which are a part of employment contracts, require an employee to consent to the process of having a third-party arbitrator settle workplace disputes. Through these agreements, employees are legally bound to resolve disputes through a third-party alternative to the traditional judicial system. [1] Employers typically hire third-party private firms to provide arbitration because the legal process is more expedited and more cost-effective than a court trial. Given that the employees waive their rights to a trial, however, the usage of mandatory arbitration has drawn a significant amount of attention and criticism since its rise. In fact, in 2022, the House of Representatives passed the Force Arbitration Injustice Repeal (FAIR) act,  which banned the usage of mandatory arbitration in the workplace. [2] Ultimately, these agreements violate an employee’s right to seek justice, may cause severe pragmatic harm to workers in the agreement process, and substantially limit the accountability of companies. 

The U.S. Constitution gives citizens the right to court trial by jury if they have been injured by another party. While courts are not perfect, they have checks and balances – , such as juries, judicial review, and an appeals process – to ensure civilians equal access to justice. Fundamentally, mandatory arbitration challenges core tenets of equity within the court system. At the most basic level, employees involved in arbitration have no rights to written records, discovery, or procedural transparency. [3] There is also no official judicial review or appeals process involved with mandatory arbitration. In addition, employees are not guaranteed an arbitrator who is trained or unbiased. With arbitration, employees are not able to file for group action suits, which deters a substantial portion of employees from bringing forward their concerns because of cost. In short, employees remain at a severe disadvantage compared to employers in the arbitration process. Specifically, this precedent is characterized by the notion that companies can have so much power over their employees that they are capable of violating and overriding the justice system. The precedent ensures an unequal distribution of power in the workplace and calls into question the validity of the judicial process. 

Aside from the principled damage mandatory arbitration causes to employees, opponents of the practice identify several practical implications of the process  as well. Specifically, employees tend to consistently lose to employers in mandatory arbitration suits. A study conducted by the California Law Review found that “employees only won about 20-30 percent of the time in  arbitration, as compared to 50 percent in state court.” [4] The cause of this discrepancy between win rates in arbitration cases, as opposed to the court system, can be explained by the innate power employers hold throughout the process. If an employer is responsible for paying for the arbitrator, as they are in virtually every case, the arbitrator or arbitration firm has a natural incentive to vote in favor of the employer. Not only does mandatory arbitration decrease the chances of employees winning their cases, but it also often leads to smaller award damages for employees. [5] The reality of these arbitration outcomes may deter employees from raising their concerns when faced with abusive and intolerable workplace environments because they believe there is no effective forum for hearing their complaints. 

The social implications of mandatory arbitration also extend beyond the individual level, impacting society writ large. Typically, nonfrivolous lawsuits against companies can drastically impact societal perceptions of the business. For instance, if a company is being convicted in a court of illegal activity or, specifically, mistreating its workers, the company may face a significant amount of negative backlash from the public. Such reactions have the power to decrease consumer investment in the company or its products. In this way, official lawsuits allow the public to hold companies accountable and, as a result, potentially incentivise organizations to act ethically and appropriately within the law. However, when all workplace disagreements, including particularly egregious cases of misconduct by companies, are kept out of public view and strictly behind closed doors, deleterious and toxic companies can continue to dominate markets and prosper in spite of their wrongdoing. 

While mandatory arbitration has several fundamental flaws, the practice is still widely popular. Proponents often claim that mandatory arbitration makes settling disputes more accessible to employees, given the typically high cost of solving problems through the court system. But even if the cost is lower with mandatory arbitration, if employees can scarcely access proper solutions and compensation for their problems, then the low cost of the practice is less relevant. Mandatory arbitration has and will continue to favor companies and corporations above individuals. The United States champions the notion that everyone and anyone must have access to a fair trial. But with mandatory arbitration continuing to grow and becoming increasingly prominent, all workers stand to lose both their rights and their cases.

NOTES:

[1] Colvin, Alexander J.S. “The Growing Use of Mandatory Arbitration: Access to the Courts Is

Now Barred for More than 60 Million American Workers.” Economic Policy Institute, 27 Sept.

2017, www.epi.org/publication/the-growing-use-of-mandatory-arbitration/.

[2] H.R.963 - 117th Congress (2021-2022): Fair Act of 2022.

www.congress.gov/bill/117th-congress/house-bill/963.

[3] Colvin, Alexander J.S. “The Growing Use of Mandatory Arbitration: Access to the Courts Is

Now Barred for More than 60 Million American Workers.” Economic Policy Institute, 27 Sept.

2017, www.epi.org/publication/the-growing-use-of-mandatory-arbitration/.

[4] Frankel, Alison. “Sweeping New Arbitration Study: 'Enterprising' Plaintiffs' Lawyers Adapt.”

Reuters, Thomson Reuters, 12 Sept. 2018,

www.reuters.com/article/us-otc-arbitration/sweeping-new-arbitration-study-enterprising-plaintiff

s-lawyers-adapt-idUSKCN1LS2YK.

[5] “Employer-Mandated Arbitration V. the Working Poor.” Georgetown Law,

www.law.georgetown.edu/poverty-journal/blog/employer-mandated-arbitration-v-the-working-p

oor/.

BIBLIOGRAPHY:

Congress.gov. "H.R.3239 - 116th Congress (2019-2020): Humanitarian Standards for Individuals in Customs and Border Protection Custody Act." July 25, 2019. https://www.congress.gov/bill/116th-congress/house-bill/3239.

Colvin, Alexander J.S. “The Growing Use of Mandatory Arbitration: Access to the Courts

Is Now Barred for More than 60 Million American Workers.” Economic Policy Institute,

27 Sept. 2017, www.epi.org/publication/the-growing-use-of-mandatory-arbitration/.

“Employer-Mandated Arbitration V. the Working Poor.” Georgetown Law,

www.law.georgetown.edu/poverty-journal/blog/employer-mandated-arbitration-v-the-work

ing-poor/.

Frankel, Alison. “Sweeping New Arbitration Study: 'Enterprising' Plaintiffs' Lawyers

Adapt.” Reuters, Thomson Reuters, 12 Sept. 2018,

www.reuters.com/article/us-otc-arbitration/sweeping-new-arbitration-study-enterprising-pl

aintiffs-lawyers-adapt-idUSKCN1LS2YK.

H.R.963 - 117th Congress (2021-2022): Fair Act of 2022.

www.congress.gov/bill/117th-congress/house-bill/963.