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Arbitration: A Double-Edged Sword for Start-Up Employees

Published onAug 09, 2016
Arbitration: A Double-Edged Sword for Start-Up Employees

For many, start-ups represent an opportunity to become a part of the next UberVenmoTinder, or to the most auspicious, Apple or Google.  Employees are willing to work longer than normal hours not only to be a part of something bigger, but also because they are rewarded with perks like daily catered lunches, company sponsored happy hours, and lavish trips.  In 2013, over 47% of college graduates were working for companies who employed less than 100 employees. A start-up’s mission goal, the culture, the pay scale, and the perks are simply too tempting for a college graduate to turn down.

Yet, as start-ups become more prevalent in the business world, the officers of these start-ups have begun to implement mandatory arbitration clauses into their employment contracts.  Arbitration proceedings are typically organized through companies like JAMS (formerly Judicial Arbitration and Mediation Services, Inc. and American Arbitration Association.  In turn, these companies hire experienced lawyers and retired judges to preside over the arbitration proceedings.

The rationale behind arbitration is that it is a “simple, inexpensive, and quick way to resolve disputes.”  For example, even though arbitration hearings are typically modeled after court hearings, many rules, like the Rules of Evidence, are more much more relaxed.  In this example, a reduction in complexity and procedure allows for a more relaxed environment and lessens the chances of a cases to be thrown out for a strict procedural deadline.

In addition, while individuals are typically better suited to be represented by a lawyer in an arbitration proceeding, the parties can choose to forego counsel for decreased costs.  An arbitration hearing can cost as little as $3,000, to resolve a dispute.  Moreover, the financial burden of arbitration is typically split between the parties to ensure fairness and accessibility.  Finally, since arbitrators are not government employees, they have a more a flexible schedule to hear disputes to make it more convenient for the parties.  Arbitrators have been known to schedule weekend hearings to suit the parties’ needs.

So if arbitration is so great, why are employees unhappy with mandatory arbitration clauses in their employment agreement?

The question boils down to the actual application of mandatory arbitration.  There are three main issues: cost, bias, and secrecy.  While the arbitration hearing can cost as low as $3,000, it is typically in the best interest of the employee to hire legal counsel to represent them despite the relaxed rules and procedures of an arbitration hearing.  After factoring in a lawyer’s hourly rate to prepare for and attend an arbitration hearing, the cost can exceed $10,000.  For some employees, it may be more cost effective just to drop the dispute rather than to proceed. The creation of a heavy financial burden is just one way an arbitration proceeding can be biased towards the employer.

In addition, the potential frequent usage of a specialized service or particular arbitrator can create an unequal playing field between the employer and employee.  Ravdeep S. Grewal, a lawyer with the Dhillon Law Group, states “An employer who enforces a mandatory arbitration agreement using the same arbitrators could possibly create an unequal playing field through repeat user bias.”  Repeat user bias calls into question an arbitrator’s impartibility, as an arbitrator’s paycheck is determined with their ability to hear a case.  Since employers are more likely to utilize arbitrators, it is possible that an arbitrator may have a bias to encourage repeat business.  Employers also play on an unequal playing field as continual usage of the same arbitrator provides them with better information and insight into the arbitrator’s views and preferences.

Finally, arbitration hearing procedures and results are typically kept confidential and not released as public records.  Employees are therefore unable to determine if a company has a history of alleged illegal conduct.  In addition, employees are unable to gauge if they undervaluing or overvaluing a potential claim since they do not have a precedent to rely on. Moreover, the lack of transparency can give way to a biased decision as arbitration decisions are typically not reviewed by a court.

Arbitration can be an effective tool for start-ups to quickly and effectively handle disputes in order to keep costs low.  These factors also aid employees as it has the potential of not creating a long, drawn-out legal battle.  However, the implementation of mandatory arbitration clauses in employment contracts should be of some concern to potential employees.  High costs, secrecy, and having only one method to resolve any potential disputes may indicate that that ideal start-up is attempting to take advantage of their employees.

Michael Fleming is a second year law student at Wake Forest University School of Law. He holds a Bachelor of Arts in Political Science and History from the University of California, Davis. Upon graduation, he intends to practice labor and employment law. 

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