An excerpt from the forthcoming book, Inside Arbitration: How an Arbitrator Decides Labor and Employment Cases by Bloomberg BNA, due Fall 2013.

By Roger I. Abrams, Richardson Professor of Law, Northeastern University School of Law

1.  Why would a nonunionized employer unilaterally establish a private arbitration system?

Employers understand that nonunionized employees may have rights under federal or state statutory law. Litigation based on statutes can be time-consuming, expensive, and ultimately may result in significant jury awards. By comparison, employment arbitration is much quicker, does not involve a jury, and can be kept private, thus protecting the reputation of the business.

In 1991, in Gilmer v. Interstate/Johnson Lane Corp., the U.S. Supreme Court enforced an arbitration provision in an employment contract entered into between a broker and Interstate/Johnson Lane, Inc., a brokerage firm that dealt in securities and futures for individual and institutional investors. After he was terminated, the securities executive sued his employer for age discrimination under the federal Age Discrimination in Employment Act (FAA). Relying on the provisions of the FAA, the Supreme Court enforced Gilmer’s promise to arbitrate claims. Thus armed with the Gilmer ruling, a nonunionized employer could keep statutory cases out of court and within a process it designs. After Gilmer, the use of employment arbitration exploded.

Management-side practitioners believe that employment arbitration offers employers protection against “runaway” jury verdicts. Lawyers who normally represent employees in discrimination cases rail against employment arbitration as biased against the rights of workers and unlikely to respect their statutory claims. There is only one comprehensive study to date of this aspect of employment arbitration, and it examined cases that were heard before the widespread adoption of employment arbitration. It concluded that employees were more likely to prevail at employment arbitration than in court, but the amount of recovery was lower in arbitration than in court. Grants of summary judgment to employers in employment arbitration cases were very rare.

2.  What should an employer include in its design of a private arbitration system?

Courts will force an employee to pursue his or her claim against an employer through employment arbitration only if it first determines that the alternative dispute resolution (ADR) system meets the test of basic fairness. At the core of any such process is an impartial adjudicator. If an employer dominates the arbitrator selection process, courts are not likely to force employees to arbitrate. There are organizations available to assist in administering employment arbitration in a manner that will meet the courts’ standards.

The American Arbitration Association (AAA) is the preeminent organization involved in the administration of employment arbitration procedures. It maintains a roster of employment arbitrators and has promulgated a set of rules for the conduct of employment arbitration cases. Judicial Arbitration and Mediation Services (JAMS) directly provides employment arbitration services from its offices nationwide. These are the two main providers of ADR services in the nonunion employment context, although there are other organizations as well.

3. How are employment arbitration hearings, labor arbitration hearings, and court proceedings different from each other?

Employment arbitration normally involves parties who no longer have an employer-employee relationship and are quite unlikely to enjoy such a relationship in the future. In this regard, an employment arbitration hearing mirrors a court proceeding. By comparison, a labor arbitration under the terms of a collective bargaining agreement involves parties who have an ongoing relationship. The way the labor arbitration hearing is conducted can have spillover effects on morale in the workplace and the parties’ continuing relationship.

An employment arbitration hearing is more like a court proceeding than a labor arbitration hearing. The parties are more likely to be represented by litigators rather than labor lawyers. There is a formality to the employment arbitration proceeding that would be out of place in a labor arbitration. For example, a stenographic record is much more common in employment arbitration. Also, many employment arbitrators see themselves as “judges” in the arbitral forum. On the other hand, an employment arbitration hearing is more informal than a judicial proceeding. It is held at a hotel or office conference room, not in a courthouse; the employment arbitrator wears business attire, not a robe; and the proceeding is private, not open to the public. In fact, the employment arbitrator is required under the AAA Rules to “maintain the confidentiality of the arbitration.”

It is possible that an employment arbitration hearing will be conducted in accordance with the rules of evidence, a practice that is unheard of in labor arbitration and not required by the AAA Rules. The arbitrator, or the chairperson of a three-person panel, will likely commence the hearing with a review of the procedures that will be followed. The AAA Rules require the employment arbitrator to record the date, time, and place of the hearing; the names of the parties and their advocates; and the demand for arbitration and the answer. Parties will present opening and closing statements and offer documents and testimonial evidence. As in labor arbitration, the arbitrator may ask questions. 

The employment arbitrator must be prepared to rein in the excesses of the advocates, something judges have learned to do through experience. Scorched-earth tactics that would be out of bounds in a labor arbitration may be the prevailing scenario in some employment cases.

At the close of the hearing, the employment arbitrator is required under the AAA Rules to “specifically inquire of all parties whether they have any further proofs to offer or witnesses to be heard.” The arbitrator will then formally declare the hearing closed, unless the parties seek to file briefs. If briefs are filed, the hearing is closed when the briefs are received.

4. What is the Due Process Protocol?

In 1995, a task force representing all stakeholders involved in the employment arbitration process issued the Due Process Protocol for Mediation and Arbitration of Statutory Disputes Arising out of the Employment Relationship. It remains the bedrock on which employment arbitration has flourished as an alternate means of resolving employment disputes. The task force’s goal was to provide “due process” in the resolution of employment disputes. Recognizing that there were risks to the fairness of any procedure created and administered unilaterally by management, the Due Process Protocol enunciated the principles that should guide the creation and implementation of employment arbitration.

The Protocol requires that only qualified employment arbitrators serve as neutrals. Although knowledge about statutory law is essential, it is equally important that persons serving as employment arbitrators know how to conduct a hearing and appreciate the distinctive nature of the workplace environment. 

5. What procedural elements should management include in an arbitration system in order to comply with the Due Process Protocol?

In a nonunionized setting, an employment arbitrator operates under a procedure designed by the employer. Although an employer may be inclined to stack the deck in its favor, the procedure must ensure the fundamental fairness of the process or courts will not compel an employee to bring his or her statutory claim to arbitration. In the first instance, employees should have the right to be represented within the employment arbitration process. The Protocol does not require the employer to reimburse an employee for the total expense of hiring an advocate, but it does recommend that “at least a portion of the employee’s attorney fees, especially for lower paid employees,” should be covered by the employer.

The Protocol focuses on the adequacy of the means available to an employee within the employment arbitration process to prepare and present his or her case. It insists, for example, that the employee and his or her advocate have access to all “information reasonably relevant to . . . arbitration of their claims.” The employee should have the right to conduct prehearing depositions.  It does not suggest in any detail how the employee would cover the costs of such necessary processes.

6. How is the selection of arbitrators and their training affected by the Due Process Protocol?

The Due Process Protocol recommends that employment arbitrators be skilled, knowledgeable, and impartial. Labor arbitrators without the relevant experience would have to be trained in the “statutory environment . . . and the characteristics of the non-union workplace” in order to serve as employment arbitrators. This training should be ongoing to keep the neutrals up to date on statutory changes and court rulings.

The Protocol addresses the problem of informational asymmetry in arbitrator selection. It is likely that the employer will have greater knowledge concerning potential employment arbitrators than will employees. Therefore, the Protocol suggests that appointing agencies provide each party with the names, addresses, and phone numbers of the advocates who represented parties before each of the arbitrators whose names are offered for the case at hand. An alternate striking method as has been used in selecting labor arbitrators would be used, but the Protocol does not speak to which party should strike first.

The Protocol emphasizes the importance of disclosure as the core strategy to avoid unfairness or bias in the arbitrator selection process. An employment arbitrator must disclose “any relationship which might reasonably constitute or be perceived as a conflict of interest.”

7. How does an employment arbitrator decide a case?

Theoretically, employment arbitrators will decide statutory cases the same way a court would resolve the same type of dispute. That must be the goal of any such proceeding. Although quicker and more efficient than litigation, arbitration of claims of employment discrimination, for example, should not be decided any differently simply because the adjudicator is an employment arbitrator and not a judge.

This means, of course, that the broad range of skills and abilities that Supreme Court Justice William O. Douglas said a labor arbitrator brings to the resolution of a labor dispute are not applicable in employment arbitration. The law of the shop and the therapeutic effects of arbitration are irrelevant in employment arbitration. The employment arbitrator might disagree with how the courts have interpreted a statute, but that is irrelevant. The parties want a judicial reading by a nonjudge, and they should get it.

This does not mean that an employment arbitrator does not consider fairness and due process in conducting the proceeding. It is essential that both parties feel they have had a full opportunity to present their cases. The adjudicator, however, cannot vary from or modify the law as set externally. The employment arbitrator does not make public policy; he or she simply administers it in a private forum.