The Power of Arbitration Agreements and Class Action Waivers

The most significant exposure an employer faces in employment litigation is a class action lawsuit. Whether it is a class asserting claims for discrimination, harassment, or overtime, the potential damages can quickly escalate when there are multiple employees all asserting the same claim. Matters only get worse when those claims are decided by juries, which will generally be predisposed to side with the employee.

One of the best ways an employer can combat this exposure is to have all employees execute an arbitration agreement and class action waiver at the outset of employment. These agreements would require that all employment disputes be resolved in an arbitration forum (rather than state or federal courts), and that employees would have to assert their claims separately rather then collectively in a class action.  The arbitration provision would also eliminate juries from deciding the dispute, and would instead use an arbitrator or panel of arbitrators that are usually practicing attorneys or former judges.  And the class action waiver has the added bonus of disincentivizing a plaintiff’s attorney from taking the lawsuit or asserting any claims, knowing that they won’t be able to get additional plaintiffs to join the lawsuit. Finally, there is more confidentiality associated with arbitration proceedings compared to courts of public record.

The United States Supreme Court has routinely upheld the enforceability of both arbitration agreements and class-action waivers. There are always matters of state contractual law that would need to be complied with, but generally speaking these agreements are fully enforceable so long as they are not drafted in a way that would be punitive to employees.  The agreements cannot cap or limit employees’ damages, or impose costs that they would not incur if the case proceeded in the court system.  Employers should consult with an attorney to make sure their agreements comply with state and federal law.

Finally, not all disputes brought by employees against the employer would be subject to arbitration. An employee could still bring workers’ compensation claims before the state agency that handles such claims, and could still bring an administrative claim for discrimination before the EEOC. But, as a whole, the arbitration agreements can prove to be very valuable by eliminating class actions and providing additional benefits of arbitration.