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Workplace arbitration becoming more costly for employers

Mark Reutter, Business & Law Editor


CHAMPAIGN, Ill. — In the wake of a 1991 court decision, a growing number of companies require employees to submit workplace disputes to an arbitrator.

The U.S. Supreme Court, in its Gilmer decision, affirmed the right of companies to create alternative dispute procedures, which require an employee to waive his right to sue his employer and instead submit his claims to an arbitrator.

The court’s endorsement of arbitration as a substitute forum for court litigation was highly contentious at the time. Some experts considered the new process to be little more than a return to the “yellow dog contract” of a century ago, which required workers to sign a pledge that they would not join a labor union. (Congress banned this type of employment contract in 1932.)

“Attorneys advised many employers to consider the advantages of mandatory arbitration to limit damage and eliminate class-action lawsuits,” two University of Illinois scholars write in a forthcoming paper.

“Some firms limited discovery, capped remedies below maximum amounts in federal employment laws, prohibited an award of punitive damages, compelled workers to pay high arbitration costs, barred class actions, selected arbitrators unilaterally, and shortened the filing period,” according to Michael H. LeRoy and Peter Feuille, both Illinois professors of labor and industrial relations.

However, the system has become more even-handed over the years, and arbitrators now exert wide powers to resolve employer-employee disputes in an equitable manner.

The authors examine one aspect of arbitration – the award of punitive damages for illegal or unfair employment practices – and find that such damages are getting more costly for employers.

The median award has increased from $52,446 between 1974 and 1995 to $750,000 between 1996 and 2004.

In 86 percent of these cases, judges later confirmed the punitive awards. “The extremely high enforcement rate for punitive damages in employment awards differs from the civil trial system,” the authors wrote.

In civil cases, “punitive damages are frequently overturned or reduced. Our findings mean that once a punitive award is ordered, employers will have much less hope of lowering it on appeal. This suggests that more arbitration cases will settle before a ruling, and for greater value, compared to identical claims in the court system.”

The authors call this development “a healthy step” in the evolution of workplace dispute resolution. “The main criticism of employment arbitration – that the process is biased against individual claimants – is blunted by our new findings. Arbitrators are able to punish reprehensible employer misconduct by awarding millions of dollars in punitive damages. Most of the time, courts do not interfere to relieve these employers of their punishment.”

The article, to be published in the Harvard Negotiation Law Review, is titled, “Reinventing The ‘Enterprise Wheel’: Court Review of Punitive Awards in Labor and Employment Arbitrations.”