If you’re an employee in the U.S., you need to know what arbitration is and the devastating effect it can have on your life. In this article, we’ll learn how arbitration is a scam, and how you can avoid falling into the trap.
Let’s talk big picture for just a second. When most people hear the word arbitration their eyes roll into the back of their heads, that is, it sounds super boring. But trust me when I say, the knowledge I’m about to share might mean the difference between millions of dollars in your bank account and nothing.
When you start a new job I know that the last thing crossing your mind is “What are my legal options if this company ruins my life?” Just because you are not thinking about your future legal rights does not mean the company isn’t. Because they are, and some companies, not all of them but some have spent millions of dollars to set up a sneaky system to limit the rights that our federal and state governments have put in place to protect workers like you. This system is called Arbitration and I’m going to reveal layer by layer why arbitration stacks the justice system heavily against employees like you.
What is Arbitration?
Traditionally employees have a right to file a lawsuit in the public court system and demand a jury trial for things like unpaid overtime, harassment, retaliation, or wrongful termination. Arbitration, on the other hand, is a contract between the employee and the employer whereby you agree to resolve any lawsuits that you have outside of the public court system.
So, in a nutshell, arbitration is an alternative legal system to the public court system that we are all familiar with. Well, when is this contract made? The answer is simple. After you accept a new job offer from a company. The HR there is going to ask you to sign a bunch of documents. Happy to have a new job!!
Most people quickly sign all the documents without reading them. And in my estimation in the U.S about 20 to 40 percent of employers ask their new hires to sign an arbitration agreement and they always put that in the new hire documents or it is buried in the employee handbook and the employee will be asked to sign an acknowledgment page that says they agree to the terms in the employee handbook.
Sneaky!! Right. Now, if you refuse to sign the arbitration agreement most companies and HR departments will rescind the job offer or they’ll fire you.
Further, if you signed a valid arbitration agreement when you started working at your company and now you want to take legal action, you cannot bring your case to the regular court system. You have to bring it via arbitration.
Okay. With all this preliminary stuff out of the way, let me give you a quick roadmap about where our discussion is going. Firstly, we’ll discuss in detail the differences between the court and arbitration. Then we’ll put forward the advantages and, mostly disadvantages of arbitration. Once we get a hang of it, we’ll discuss the options for how to avoid it and finally, we’ll conclude by going into detail about how you can get out of arbitration if you already signed an agreement.
The Differences Between Court and Arbitration.
In arbitration, as opposed to having a judge as you would in court, you have an arbitrator who oversees the case. This is usually a retired judge or a former defense attorney.
In court, the judge is paid by our tax money by the government. In the case of arbitration, the arbitrator is paid hundreds of dollars an hour by the company being sued.
In court, a judge is not allowed to have a conflict of interest. Arbitrators on the other hand have them all the time and only sometimes are they disclosed.
In court, you are randomly assigned a judge who is supposed to be impartial and he/she must recuse himself/herself if they have a conflict of interest. In arbitration, the lawyers get together and pick the arbitrator.
In the public court system, the judges must follow the fairness rules regarding discovery and the deadlines that are set up so that each side gets a fair shot to gather relevant evidence from the other side. In arbitration, the arbitrator can severely restrict your lawyer’s ability to gather evidence.
In court, if the case does not settle, you’ll have a trial at the courthouse. In arbitration, it’s not called a trial, it’s called a hearing and it is usually held in some private corporate conference room or a lawyer’s office.
In court, your trial is decided by a jury of your peers while the judge is there simply to ensure fairness. In arbitration, the arbitrator is the sole decision maker. They act both as judge and jury
And finally, in court, you have the right to appeal the wrong decisions. In arbitration, you have no right to appeal a wrong decision.
Advantages and Disadvantages of Arbitration
Next, let’s talk about the 10 most important advantages and disadvantages. You need to understand these, we covered a few of these briefly in this blog post where we discussed how HR cheats on employees.
Number one, SPEED. Everybody knows that America’s legal system is really slow. That is absolutely true. In comparison to the regular court system, arbitration typically leads to a faster result. But that doesn’t mean arbitration gets the right result faster. It usually just means that the case ends faster, regardless of correctness.
Number two, INCENTIVES. This is the topic you really need to pay attention to. The big advantage for companies is that arbitration is a system that monetarily rewards arbitrators who rule in favor of companies and it monetarily punishes the arbitrators who award money to employees.
Here’s how it works. If you’re an arbitrator, who’s paying you? Absolutely, the company is paying you. Arbitrators get paid hundreds of dollars an hour by the company being sued. So if you’re an arbitrator and you rule in favor of an employee, then guess what? That company will not agree to use you again in the future and their lawyer will tell all of his lawyer buddies not to use you as an arbitrator because he lost a case.
Think of the balance of power here. Companies are repeat customers for the arbitrators. Massive corporations get sued all the time. If an arbitrator makes them happy, they could make hundreds of thousands of dollars each year from that company alone.
On the other hand, individual employees like you are not repeat customers. Most people don’t get wrongfully terminated twice, right? It just doesn’t happen. So they have no money or future money to offer the arbitrator. Arbitrators know if they rule in favor of the company they’ll likely receive repeat business from that company or at a minimum, they’ll get a positive referral within the defense lawyer community.
A very prominent lawyer once narrated a story that when he was young, he got a million dollar plus verdict in arbitration for his client employee. It was a great result for that client. Guess what happened later? The arbitrator who made that decision never worked again because no company would agree to use him. You don’t have that flexibility in the regular court system, right? But this doesn’t mean, if you are stuck in arbitration then you shouldn’t bring your case
Number three, let’s talk about PRIVACY. The regular court system is public by design. Arbitration, on the other hand, is private by design. Companies obviously love their privacy because it keeps their dirty secrets out of the public eye.
On the other hand, this can be an enormous disadvantage for you because public pressure when warranted can really motivate a company to settle. It can discourage them from destroying evidence and it forces them to make actual structural changes at their workplace so that this bad thing doesn’t happen to another person.
Number four, and this one is quite interesting, you need to pick or your lawyer needs to PICK THE DECISION MAKER. Once a dispute has been filed in arbitration, the lawyers from each side go back and forth proposing names, and eventually, they usually agree on an arbitrator. So you have some say on who is going to be the decision maker. Now, this sounds good at first until you realize that the pool of arbitrators from which to pick is heavily tainted and defense-oriented. If your lawyer and the defense lawyer cannot agree on an arbitrator, then the default rules kick in and the system will select one for you.
That isn’t a good option either because the entire pool of arbitrators is almost all defense oriented now it is possible that you can get an unbiased arbitrator and it’s possible that an employee can get a decent result in arbitration. But the odds of that are extremely low and you need to pay attention to the odds in litigation.
Number five, FINALITY. This is again most important. Companies love that when the arbitration is over, the case is over. There are no appeals. While that might sound like a good thing but it’s not if you are the party that believes the wrong decision was made and unfortunately in employment arbitration, usually the employer wins. So, remember the odds.
Number six is SIMPLIFIED DISCOVERY. The most burdensome part of a lawsuit is discovery. Discovery is the process that the parties go through to gather evidence from the opposing party. It involves things like depositions, inspections, document exchanges, and a whole lot more. Arbitration is supposed to streamline this burdensome process. In theory, that sounds great. But the reality is much different. You see, for employment disputes, in particular, the employee is trying to prove that they were fired because their boss had an unlawful motive such as, for example, the boss decided to fire you because you made protection to HR.
After somebody has been fired, they don’t have access to documents, witnesses, emails, text messages, etc. They are cut off from all the important evidence.
The company on the other hand still has access to all the evidence, that is, all the evidence, all the emails. So the employee is at a natural disadvantage at the start of every case.
In court, this is okay because the rules of civil procedure level that playing field by allowing the employee’s lawyer to do liberal amounts of discovery. So they have an opportunity to gather the evidence, whatever it may show. But arbitrators, in reality, don’t have to follow the rules of civil procedure.
So in order to streamline the discovery process, the arbitrator just severely limits the discovery that your lawyer can do.
For example, let’s say, in court, your lawyer would ideally like to do ten depositions and send out eighty document requests. In arbitration, it’s highly likely that the arbitrator will limit that down to three or two depositions and maybe 15 or 20 document requests. Unbalanced, this absolutely puts you, that is, the employee at a huge disadvantage.
Number seven is the EXPENSE of the case. One of the big advantages is that it’s cheaper than going to court. But this is completely misleading. It is cheaper for your employer, not for you. If you have a good wrongful termination case, you will be able to find a good employment lawyer who will take your case on a contingency fee basis. That means, your lawyer is getting paid a percentage of what they recover for you regardless of how long it takes, regardless of whether it’s an arbitration or court.
It’s cheaper for the companies primarily because the arbitrators restrict the discovery as we just talked about. The affordability of arbitration does not apply to employees at all. So this is completely misleading.
Number eight, CLASS ACTION WAIVER. In 2018, the US supreme court ruled that arbitration agreements can include a class-action waiver. That means, if you signed an arbitration agreement with a waiver, you cannot bring a class action lawsuit against the company.
Why does this matter? Well, let’s say the company has failed to pay you seven thousand dollars in wages. Seven thousand dollars is a lot of money. But that is not enough to justify hiring a lawyer and pursuing a lawsuit against the company. The costs will quickly overwhelm the value of that. Those smaller claims are just not worth pursuing. Even on a contingency basis.
But if you and your lawyer can gather 50 or 100 people together to sue on a class-wide basis. Then the case becomes economically viable to pursue. What this means is that if there’s an arbitration agreement, those smaller claims just don’t get pursued.
That means the company essentially gets away with thefts. By my estimate, tens of billions of dollars of employee money across America are lost every year because of these class action waivers and arbitration agreements.
Number nine, SETTLEMENTS & VERDICTS. When your case is forced into arbitration, its settlement value is substantially less than it was in the regular court system. That’s great for the company and obviously terrible for you.
But why does this happen? Because you are the one less likely to win and two if you do win you are less likely to win big. Therefore companies are less likely to pay you significant money to settle the case.
Number Ten, HARDER TO GET AN ATTORNEY. It’s going to be harder, right? If you sign an arbitration agreement. Employment lawyers don’t get paid by the hour, they get paid a percentage of what they recover for their clients. So, if arbitration reduces the value, it makes it harder for employment lawyers to justify taking the case. They can absolutely take a case that is stuck in arbitration, it just needs to be far above average in terms of liability and value
Unfortunately, there are a lot of people who have a decent case, but it’s just an average case and because it is stuck in arbitration, it’s less likely that an employment lawyer may take up that case.
Are You Doomed If You Sign An Arbitration Agreement?
The answer from our side would be, absolutely not. But why? Considering all the bad stuff I just taught you, why should you even try to bring a case? Well, there are a bunch of reasons
Number one, if you don’t bring your case, the company is going to get away with injustice on top of the violation of the law. That means they would be emboldened and they would do the same thing to the next person who is in your position.
By bringing the case and applying legal pressure, you are teaching them how to behave in the future.
Number two, there is a chance that your arbitration agreement is invalid and you’ll still be able to go to court. There is also a chance that even if it is valid now, it will become invalid in the future due to the growing recognition among policymakers that arbitration is a rigged game
Number three, you can still get a result that is worth the fight while the result might not be as large as it would be if it was in court it might still be worth it for you
Number four, in some cases the employer will want to settle with you faster to avoid having to pay the arbitrator. The arbitrator is expensive and some employers don’t want to spend the money that would speed up the settlement. This happens a lot in clear liability cases where the value at issue is under 100 grand.
How Can You Avoid Arbitration?
Well, the obvious way to avoid arbitration is to get a job at a company where they don’t require it. By our estimate, as we mentioned earlier, only 20 to 40% of the companies in the USA ask their employees to sign an arbitration agreement in the first place. So if you are looking for a job and you are being interviewed by a company, ask the HR representative, “Do you guys require us to sign an arbitration agreement?” If they say yes, take that into consideration.
But let’s say you’re reading this article because you were just asked to sign an arbitration agreement, what can you do then? Well, you’ve got four options, and we strongly recommend that you carefully go through all four options before you decide what to do. Additionally, if you’re really facing this decision, it would be wise to contact a lawyer in your state or country if you really need advice on the matter.
Option Number 1. Don’t sign it, say nothing, and see what happens. But what do we mean by this? Well, when you get hired at the company, all the other documents that they require you to sign, sign them all, except for the arbitration agreement. Put it all in a giant pile and turn everything in, once again, excluding the unsigned arbitration agreement, and don’t say a word about it.
There are a lot of HR representatives who are not going to even notice that you didn’t sign it. Thumbs up!! Awesome!! Right.
Option Number 2. Sign the Documents, but cross out the bad parts and see what happens. Again it sounds very simple, but it can work. Depending on the structure of the documents, that you’re been asked to sign, it might be better to sign the documents, but cross out the section on arbitration, initial next to the cross out, date next to the cross out, turn it in, and say nothing.
Again, it’s possible that the HR representative won’t even notice that you crossed out the section on arbitration. If the arbitration agreement is buried in the employee handbook and the HR representative insists that you sign the acknowledgment page, then go ahead and sign it. But right below your signature, something like “I do not agree to this section on an arbitration, I do not consent to give up my right to pursue any case in court in front of a jury.”
Further, find a page on arbitration, cross it out, initial and date next to it, turn both pages in and again wait to see what happens. It is possible that the HR representative will be lazy and just ignore it and you’re good to go.
Now, signing something but crossing out the stuff you don’t like is not a guaranteed way to avoid the contract. Every state has different contract laws. But we can guarantee that crossing the stuff out, like initialing, dating, and doing things like this will give your lawyer a whole lot more ammunition to contest your arbitration agreement down the road, which we’re gonna talk about in further sections.
Number three, Refuse to sign it. You can just tell HR that you’re not going to sign it. The risk in doing that is that they are going to rescind the job offer. Or, if you are already employed then they might fire you if you refuse to sign it.
With this strategy, there are two big things that we need to think about. The first is that the company is hiring you because you possess the skills that it needs to make money. If you bring enough value to the company, you have, what we call “bargaining power”, my friends. You can just refuse to sign the arbitration agreement, and if they want you badly enough, they will relent and hire you anyway.
Obviously, everyone’s circumstances are different here, so it’s hard to say that this will work for you. And unfortunately, if you really think about it, this isn’t the reality for a lot of people. A lot of people just don’t have a lot of bargaining power because let’s say they just got out of high school and they are applying for a job at Walmart. In this case, you don’t have bargaining power because you cannot bring a lot of value to the organization. So, implement this strategy at your own risk.
But the other thing that we need to talk about is, in some states like California are figuring out that arbitration is contrary to humanity, a sense of justice and fairness. As a result, California recently passed AB 51. AB 51 is a law that prohibits employers from requiring employees to sign arbitration agreements as a condition of employment for disputes underneath the California Fair Employment and Housing Act or the California Labor Code.
And luckily for you, the vast majority of the reasons why you would ever wanna sue an employer follow those two bodies of law. What this means in simple terms is that employers are prohibited from requiring their employees and their perspective employees from signing arbitration agreements. So, if you are in California you can refuse to sign the arbitration agreement and tell HR that AB 51 allows you to decline to sign and they’re not allowed to fire you or refuse to hire you because of this.
However, that is not the whole story. At the time this article is being published, AB 51 is being challenged in the Ninth Circuit court of appeals. A temporary injunction is in place at the moment. So this is not settled law. It can be overturned by the time you complete reading this article. We can’t predict what’s gonna happen. So, if you work in California, you have to be careful taking a strong position on this in the future.
Option number four. You can negotiate terms. If the employer won’t hire you without your signature on the arbitration agreement, then you can try to negotiate certain terms to get a more favorable arbitration agreement or just get more favorable employment terms. Keep in mind, this is a contract, and you can try to change the terms.
Here are a few terms that you can use as bargaining chips, viz., “I’ll agree to sign the arbitration agreements if you increase my base salary by 30 to 40%” or whatever you want.
Another one, “I’ll agree to sign the arbitration agreement if I have the sole discretion to pick the arbitrator if a dispute between the company and I arises.”
Or, “I’ll agree to sign the arbitration agreement if you allow me to work home three days a week.”
Obviously, you can get creative here, and I’m just scratching the surface. And if they agree to one of your terms, please do get it in writing before you sign anything.
If You Have Signed An Arbitration Agreement Already, Can You Get Out Of It?
Well, yes. But how do you do it? The most obvious answer for this is to quit and find a new job where they don’t require it but that’s obviously not realistic. If you are happily employed somewhere, we would never recommend that you quit your job just because you signed an arbitration agreement. Chances are that you won’t have a legal dispute with the company down the road.
Aside from quitting, what’s the best way to get out of arbitration agreements? Well, the way I see it, there are four options
The first one has to do with SEXUAL HARASSMENT. Probably on March 3rd, 2022, the US president signed HR 4445. Which is a nationwide law that invalidates arbitration agreements when one of the underlying claims is sexual harassment or sexual assault. In other words, 4445 says that an employer cannot force you to arbitrate your lawsuit if one of your claims is sexual harassment or sexual assault. Even if you signed a valid arbitration agreement.
Now, this can apply to things like wrongful termination as well. Let’s say you are being sexually harassed by a coworker. You complain about it to HR, but then the company retaliates against you and you get fired. While the main claim here is wrongful termination, it’s likely you can keep this case out of arbitration because one of the claims you are going to bring is that you were sexually harassed. Pretty awesome, right?
Number two has to do with SECURITIES FRAUD, under Sarbanes-Oxley. Employers are not allowed to force arbitration on whistleblower claims under the Sarbanes-Oxley act, probably it’s called the Dodd-Frankly act.
These two laws deal with securities fraud when the employer is a publicly traded company. Here’s how it works. Let’s say that you are an accountant for a publicly traded company, and while you’re doing your work, you realize that your employer is cooking the books and reporting false information to the public and the SEC. If you complain about that to your manager or to the SEC or to somebody else that’s relevant and then you get fired, you can file a whistleblower claim.
Under this kind of scenario, 18 US Code 1514 A subsection E will prevent the employer from forcing you to arbitrate your claim. Even if, once again, you signed a valid arbitration agreement. Also pretty Awesome.
Number three is UNCONSCIONABILITY. This is the main way to challenge an arbitration agreement. Basic contract law 101 says that you can get out of a contract if the contract is found to be unconscionable. But what does that mean? Well, in California, unconscionability is the absence of meaningful choice on the part of one of the parties together with contract terms that are unreasonably favorable to the other party. This definition comes from Armendariz V. Foundation Health, a major California Supreme court case.
Now your state may have a different definition. But most states say that unconscionability requires a showing of both procedural unconscionability, which is unfair bargaining power, and substantive unconscionability, which is a serious defect in a deal in the document.
Procedural unconscionability results from the oppression caused by unequal bargaining power. Usually, the employee has more bargaining power.
Substantive unconscionability focuses on overly harsh or one-sided terms. Now courts utilize a sliding scale balancing test when analyzing this whole unconscionability thing. Most of the time employees win that an agreement is procedurally unconscionable. But they usually lose when it comes to substantive unconscionability. Most lawyers have lost at the substantive unconscionability level
Now, if you are not a lawyer, we wouldn’t get bent out of shape researching unconscionability or figuring out what all this means. That’s a waste of your time. If you have a good case, your lawyer will carefully read your arbitration agreement and if they believe there’s a chance to get out of it, they’ll file your case in court and force the defendant, which is the company, to make a move to compel arbitration.
Then your lawyer will file an opposition and the judge will decide if you can get out of it. Now, there is not anything you can do to make the agreement that you already signed more unconscionable. The best thing that you can do is pray that your lawyer makes good arguments under your state law and that the judge agrees and rules in your favor
But this is highly variable based on your state law, the predisposition of your judge and how good your lawyer is, and also how bad the company’s lawyer is.
Number four, RENEGOTIATE. You can always renegotiate. Although we never came across the news of anyone trying to do this, but it’s worth talking about. You could try to convince your employer to scrap the arbitration agreement by gathering a bunch of employees together and using arbitration as a bargaining chip in a labor negotiation.
So let’s say a couple of hundred employees are negotiating a pay raise for the next five years. You could ask the employer to eliminate the arbitration agreement that you have already signed and in exchange, you will give up some employee benefit that you think you’re entitled to.
Once again, arbitration is a contract. So the parties to that contract can change their minds and get out of it.
This article only intends to cater to the informational requirements of the audience and should not be taken as a piece of legal advice. If you are in need of actual legal advice, contact a qualified and experienced lawyer in your state or country with whom you can thoroughly discuss your matters and also put forward the cautions and tips discussed in this article.