The Expensive Addiction to Arbitration

 In Employment Law, Overtime Law, Wage Law

Like most addictions, the addiction to arbitration is expensive. Often touted by defense lawyers and business advocates as a less expensive, more efficient alternative to the court system, arbitration is neither. Arbitration is a money pit for employers and particularly more expensive for employers defending themselves against wage and overtime claims.

If you do not believe me (yes, I am a plaintiff’s lawyer), just ask Uber or any other number of employers who thought arbitration was a less expensive alternative for resolving disputes with their employees, only to find out that the company (and not their employees) are responsible for paying the exorbitant costs of arbitration – costs that are not part of using the judicial system. The old adage seems particularly appropriate, “be careful what you wish for.”

Let’s Arbitrate!

The story is simple enough, a company is sold on the idea that arbitration is a less expensive way to resolve disputes with their employees. Heeding that advice, the employer institutes a policy requiring all of its employees to resolve disputes against the company using mandatory arbitration. All is good until it isn’t.

The company is served with a collective action lawsuit for unpaid wages filed by a former employee on behalf of all the company’s employees. The company’s defense lawyer whips out the company’s arbitration program and files a response to the lawsuit asking the court to order the case to be decided in arbitration. However, word spreads quickly and several other employees learn they were subject to the same compensation policies and join the lawsuit. The court then grants the company’s wish to arbitrate the claims and orders the parties to arbitration. Yet, the company’s victory is short-lived.

“Be Careful what you wish for”

Shortly after being ordered to arbitration, the plaintiff’s lawyer begins filing arbitrations on behalf of each employee, separately. Assuming the company’s agreement requires the claims to be arbitrated with the American Arbitration Association (“AAA”), each employee is responsible for paying a filing fee of $300.

However, the company learns it is required to pay the AAA a filing fee of $2,500 plus a case management fee of $1,000 for each employee who initiates arbitration. In addition, the company then learns it is also responsible for compensating the arbitrator(s) who are often lawyers and charge similar hourly rates. Most arbitration provisions provide for a three-arbitrator panel, which again, the company is responsible for paying their fees. On average each arbitrator charges $300 per hour and spends a minimum of 20 hours on each case all of which the company is responsible for paying.  Of course, the cost could be significantly more depending on the complexity of the case or various other factors.

By way of example, assume there are 30 employees who have filed claims against the company. The company would be out of pocket $105,000 just for filing fees and case management fees to the AAA. [$2,500 filing fee + $1,000 case management fee x 30 employees = $105,000] In addition, the company can expect to pay the arbitrators another $540,000 for their time. [$300 per hour x 20 hours x 3 arbitrators x 30 employees = $540,000]. In sum, the company could expect to pay a minimum of $645,000 just to the AAA and the arbitrators, not to mention anything for attorneys’ fees to defend each of the arbitrations. This is money the employer simply would not have incurred had it not compelled arbitration – federal courts do not require defendants to pay filing fees and do not require litigants to compensate the judges.

Death by 60,000 Cuts  Arbitrations

As mentioned above, in response to its drivers filing collective action wage lawsuits, Uber compelled its drivers to arbitration. Now there are more than 60,000 arbitrations pending against Uber, which experts estimate will take decades to resolve with a cost of at least $600 million – and that is before accounting for any judgments awarded. Ouch! Be careful what you wish for!

Let’s Arbitrate Stay in Court!

Let this be a warning to employers who wish to whip out those “cost saving” arbitration programs in response to a lawsuit. Prudent employers will choose to resolve employment disputes in federal courts, where the employer can address all the employees’ claims in a single lawsuit, called a collective action lawsuit.

Arbitration may seem like an attractive option, but employers should carefully consider the costs associated with Arbitration before deciding to proceed. In wage and hour employment disputes, an employer is almost certain to incur significantly greater costs in Arbitration than it would in a collective action lawsuit filed in federal court. But, then again, don’t take my word for it, I am just a plaintiff’s lawyer.


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