Many states have upheld different opinions on whether “Arbitration as a Condition of Employment is Legal.” OnSite Consulting considers why this topic requires attention.

Onsite has years of experience handling employment disputes, creating employee handbooks and seeking methods for companies to mitigate their expenditure. The issue of arbitration and the need for a formal policy and implementation of this policy remains widely ignored. All too often, our clients are served with legal papers and with barely time to read the papers, have no choice but to mandate to a law firm to represent them, often at significant cost.

Onsite is encouraging its clients to consider taking proactive steps towards mitigating this potential unexpected cost – a cost which hits a company in terms of both cash and management time- by adding a clause to staff handbooks and rolling out an internal policy that deals with this issue.

The perception of arbitration is all too often a negative one.  Many employees sign an employment contract containing a clause requiring mandatory arbitration which, in their opinion, is a company’s way of avoiding litigation. Fears include concerns that their employers will operate outside of the law and potentially violate an employee’s rights without fear of the consequences. The company requires arbitration and they believe that it curtails their obligations to operate within fair and reasonable parameters.

Of course this is not the case at all and employees need to understand that arbitration is not a soft option but is, in fact, in their best interests. With a rigorous arbitration policy in effect, the desire is NOT to reduce the value or ability of an employee to receive damages nor for the company to attempt to reduce such payouts. If an employee has a bona fide claim then they are entitled to damages. The principle value of arbitration is to reduce the cost of reaching a settlement or payout amount given that arbitration as opposed to the more costly option of a court room is where damages are agreed. The driver of adding an arbitration clause is therefore faster resolution of a claim with a dramatic reduction in cost which benefits all parties involved.

There is a second debate around arbitration, with a suggestion from some parties that it removes the “jury determined awards” that are based partially on emotion instead of an arbitrator, who makes a judgment based on the law only. Empirical research has, however, found little difference between the behavior of jurors and arbitrators when it comes to punitive damages.

When Florida based Darden Restaurants (Red Lobster and Olive Garden are among two of the brands that contribute to its $6.7 billion annual revenues) determined that arbitration was the best scenario for employee issues, their General Counsel specifically noted:

“We [Darden] don’t expect any significant reduction in paying out damages or compensation to employees who have legitimate claims, but we expect our transactional costs [court-related fees] to be reduced by 75 percent. Right now for every dollar we are paying out in compensation to employees, we are paying about $1.50 in transaction costs.”

Small owner operated restaurants and venues with fewer than 10 unit foodservice operations are following in the footsteps of large restaurant chains such as Darden. The pace at which venues are adopting a mandatory arbitration requirement as the absolute authority for resolving workplace disputes is gathering momentum, and rightly so. Coupled with this clause is the need to educate and inform employees as to why this clause is present which can be achieved in an employee newsletter or simple memo to staff.

Arbitration is without doubt mutually beneficial to employees and employers however there is still resistance. For the many commission, retainer or standard rate based lawyers and employment advisors, arbitration reduces the amount of time chargeable and is therefore potentially less popular. Less time equates to less fees.

It is the employer, therefore, who arguably gains considerably from arbitration as it serves to protect them from the potentially huge financial costs of frivolous litigation, petty disputes and the need to go to Court over issues which can be dealt with via an arbitrator. Medium to small businesses often do not have the financial resources or management time available to fight large cases in a court room so the option of arbitration becomes incredibly attractive as a proactive step towards mitigating future court fees.

The employee also benefits as the time spent being represented is reduced, which in turn reduces legal bills for the individual – and ensures a faster payout where damages are justified. In many instances, the cost of representation and the ‘lost time’ is equal in financial terms to the value an employee may be seeking in compensation, so we see many cases not defended at all but instead allowing the employee to gain a default judgement – or in larger cases, the employee ultimately not defending their claim. Again, arbitration solves this issue.

For companies intending to implement an arbitration policy, there are many steps to take prior to an actual arbitration. These range from peer reviews to an ‘open door policy’ where employers and employees can negotiate without an arbitrator present. Whatever a company chooses to do, of primary importance is ensuring the policy is clearly defined and understood, with the intention always being to resolve the issue prior to arbitration but knowing that arbitration itself is a practical and cost effective alternative to entering the court room.

 James Sinclair of OnSite Consulting provides hospitality clients, including restaurants, hotels, casinos & nightclubs, on effective F&B strategies for long term business success. For more information please visit www.onsiteconsult.com