Do Employment Arbitration Programs Reduce Legal Costs?

We continue our series examining whether an employment arbitration program can help minimize legal risks from COVID-19 and beyond by considering another question employers should ask when deciding whether to adopt an employment arbitration program:  Does employment arbitration reduce legal costs?  As explained below, we suggest that the answer is usually “yes.” 

We recognize there may be strong opposing views on this subject.  We also accept that, at times, the costs of arbitrating employment claims can outpace the costs of litigating the same claims in court.  But such times, we argue, are limited and can be mitigated by arbitration agreements crafted with care. 

Why Arbitration is Usually Less Expensive than Litigation in Court

The view of arbitration as a cheaper alternative to litigating employment claims in court is not new.  The Supreme Court has recognized this in decisions.  And unionized workforces have long used arbitration to resolve employment disputes, in part, because of the cost-savings it offers.  We suggest that employment arbitration is often less expensive than most comparable court proceedings.  Here are some reasons why:

• Arbitration programs and agreements can have pre-arbitration dispute resolution steps built into them. These steps can be mandatory or permissive, and formal or informal.  They can include, for example, an open-door employee complaint and employer response process, panels of employees who review and can overrule adverse decisions, or mediation.  Such pre-arbitration steps often result in a resolution before any party even hires an attorney.    
• It is widely accepted that arbitration, in general, is a faster way to resolve disputes than going to court. Civil litigation is often slower due to flooded dockets and lengthy discovery proceedings.  One 2017 study conducted by the firm Micronomics concluded that, on average, U.S. District Court cases took 24.2 months to reach trial, compared to 11.6 months in arbitration.  “Faster,” of course, does not always mean “cheaper.” Arbitration, however, offers more streamlined procedures for discovery, motion practice, and trial.  In most cases, such streamlined procedures translate into reduced legal costs. 
• Many have read headlines about runaway jury verdicts in employment cases. The threat of that potential outcome can drive up the settlement value of a case.  While arbitrators can and do issue fair and substantial damages awards, most agree that arbitrators are less likely than juries to issue excessive damages awards. 
• Arbitration is generally binding and final. Compared with appeals of court decisions, appeals of arbitration decisions are rare and limited.  Accordingly, arbitration keeps appeal costs down.
• Drafted properly, arbitration agreements can often prevent many types of expensive class and collective actions. Arbitration agreements can require arbitrations to proceed on an individual basis, with certain exceptions.  Class and collective actions in court are often bet-the-company cases, and the costs to defend against them are high.

Why Arbitration Is Sometimes More Expensive than Litigation in Court

Arbitration is not a silver bullet that ensures lower legal costs.  There are times when legal costs associated with employment arbitration are significant.  Here are some reasons why:

• Employees sometimes file claims in court even when they have entered arbitration agreements covering their claims. In some situations, battles in court to compel arbitration may be unavoidable, and can involve motion practice, hearings, and sometimes even mini-trials on the issue of arbitrability.  In such cases, legal costs can be substantial before a case even reaches an arbitrator.
• In arbitration, employers generally must cover the costs of the arbitration beyond the initial filing fee that the employee would otherwise have to pay in court. Employers also have to pay administrative fees to the arbitration forum along with hourly fees for the arbitrator to preside over the case.  These costs are often contained.  But arbitrators have discretion over arbitration proceedings, and may allow for costly discovery and motion practice. 
• Dispositive motion victories are less common in arbitration than in court. To some employers, this is a non-starter.  A claim that could have been defeated through a motion to dismiss or a motion for summary judgment in court might require a full evidentiary hearing in arbitration.  A case disposed of in court at the pleading stage is generally less expensive than a case disposed of in arbitration after discovery and a hearing. 
• If allowed by an arbitration agreement, arbitration on a class wide or collective basis may be more expensive than litigating class or collective claims in court. Such arbitrations often combine the sort of lengthy discovery and motion practice prevalent in court with the additional administrative costs and arbitrator fees unique to arbitration.  The cost of such proceedings can be astronomical.
• In the face of arbitration agreements containing class action waivers, some plaintiffs’ lawyers have undertaken “mass arbitration” campaigns. In these campaigns, plaintiffs’ lawyers file hundreds or thousands of arbitration demands at once.  Employers then bear the cost of significant filing fees at the beginning of each arbitration, along with administrative fees and hourly fees to arbitrators.  The up-front costs to employers of mass arbitration campaigns alone can be massive.  (Stay tuned for our next piece, taking a deeper dive into the risks of mass arbitration and potential solutions for employers).

In sum, employment arbitration programs often offer a lower cost alternative to litigation of employment disputes in court.  While there are exceptions, many of the costly pitfalls associated with arbitration can be addressed with careful drafting and execution.