Many employers utilize mandatory arbitration agreements, claiming that they "make the process more efficient." I find that they tend to drive up the cost of litigation because the employer must pay the fees for the arbitrator that can run several thousand dollars a day. As such, many employers simply choose to settle the case rather then paying the exorbitant arbitrator's bill -- which I guess is making the process more efficient.
The main problem with arbitration agreements comes up with class actions. Because class actions are going to be expensive no matter what, many employers feel that they can receive more favorable treatment in arbitration. In general, the defendant will try to push a class action into arbitration, and the plaintiff will try to keep it in court. However, as the case of Long John Silver Restaurants v. Erin Cole shows, arbitration is not always in the employer's interest.
In a recently published decision out of the 4th Circuit, the court refused to overturn an arbitrator's decision even though the decision would likely never have stood up in court. Normally, FLSA claims must be brought under something called a collective action. A collective action is similar to a class action except that employees must "opt-in" in order to be part of the class. That is, in a normal class action, a letter is mailed to all class members, and unless they affirmatively opt-out -- that is, mail back the form saying they do not wish to be part of the class, then they are part of the class and the company will have to pay for their damages, if they are proven. In a collective action, a letter is sent to all potential class members, and each of the must mail in a letter stating that they wish to take part in the litigation. If they do not mail the letter, then they are not part, and the company does not have to pay them anything.
Conventional wisdom in employment practice says that only 25% of employees will mail in the opt-in form. Thus, collective actions definitely favor the employer because it means they will only have to pay 25% of what they should pay. In the court systems, FLSA claims can only be brought as collective actions. Thus, if you have an overtime violation that spans several states, you might pursue it as a collective action, rather than try to coordinate several class actions across multiple states.
Fortunately, the arbitrator in the Long John Silver case decided to eliminate the overhead of the collective action. He determined that because the employees had all signed an arbitration agreement that allowed for class actions, this served as a waiver of the obligation to bring a collective action. Thus, the plaintiffs had the remedies of the FLSA with the procedures of a class action -- the best of both worlds. Note that this reduced the cost of the litigation processes, but it greatly increased the amount of damages the employer had to pay.
Interestingly, rather than praising this arbitrator for streamlining the process and reducing the cost of litigation, the employer tried to have the arbitrator's decision overturned by a Court. It seems that employers love arbitration, until they get ruled against, then they will force the battle into court. In any case, the Court decided that the arbitrator was within his rights to eliminate the requirement for the opt-in, and the employer would have to live with the arbitrator's decision.
This was an interesting case for a number of reasons. Most important though is that employees should not be afraid to raise a claim just because they have an arbitration agreement in place. In many cases, this can work to the employee's advantage. Also, many employers are willing to waive arbitration. In fact, I just had a trial on a case in which a valid arbitration agreement was in place, but both sides decided to waive the agreement and go to court. In other cases, I have had to compel arbitration because the employer did not want to arbitrate, even though they were the ones that insisted that an arbitration agreement be signed when the employee first began work.
Also, a thanks to reader, Joe, who brought this case to my attention.