Are arbitrations unfair to employees and consumers?

Q:        I recently applied for a job and I was asked to sign an arbitration agreement as a requirement to being hired. I heard arbitration agreements are not fair to employees. Is this true?   

A:        Yes. Arbitration can be unfair to employees as well as consumers.

Arbitration is a procedure to resolve disputes without filing a complaint in court. The disputing parties refer the case to a third party (the arbitrator) who makes a decision that is legally binding on both sides. By signing an arbitration agreement, the employee agrees to resolve any claim against the employer before an arbitrator and not before a judge or a jury. This means the employee cannot file a lawsuit in court to resolve the claim.

Court proceedings are public, with the case being heard either by an impartial judge or an independent jury. An arbitration proceeding is a private process in which an arbitrator is hired by the parties to make a decision regarding the dispute. Arbitrations are paid by the hour, either by one or all of the parties. The process and its results are generally not disclosed to the public. The parties are bound by the arbitrator’s decision and the losing party cannot appeal.

Professors from the Stanford Graduate School of Business reported that arbitrators tend to be more company friendly.  They analyzed data containing 9,000 arbitration cases. As arbitrators naturally wanted to have more work, the report reached a common sense conclusion: The more that arbitrators ruled in favor of businesses, the more that they will be hired in the future.

A finance professor who co-authored the Stanford study, Amit Seru, remarked that: “The whole game is stacked against us.” Consumer columnist David Lazarus wrote that you just cannot believe arbitration is better for consumers.

In another study by attorney Genie Harrison, in a Daily Journal article entitled “Arbitration is Failing California Employees,” the data showed that favorable outcomes in arbitration generally belonged to the employers paying the arbitrator’s fees. This is evident in situations where the employer’s attorney is a repeat client of the arbitrator.

According to the study, during the period of 2012-2017, nearly half of employment arbitrations handled by AAA (a major arbitration company) involved Macy’s as the employer being sued. Data showed that 93% of the cases against Macy’s were dismissed. Meanwhile, the other half of AAA’s non-Macy’s employment cases only had a 7.5 percent dismissal rate. The employees who sued Macy’s are disadvantaged in other ways. For example, data showed that even when they “won” in arbitration, their average money award was only $87,000 compared with an average award of $328,000 to non-Macy’s employees.

The study goes on to state: “The data consistently show that arbitration outcomes favor the defendants and defense firms that pay the bills. To make matters worse, arbitrators are not required to follow the law, and there is little opportunity to appeal an arbitrator’s ruling. Coupled with data about arbitration outcomes, it is no wonder that the system seems so unfair.”

Lastly, the report states that arbitration does not resolve faster than litigation. The average length of arbitrations from 2012-2017 ranged from 14 to 19 months. Meanwhile, California’s 2018 Court Statistics Report, showed that most employment cases between 2007 and 2017, resolved at average rates of 75 percent within 12 months; 85 percent within 18 months; and 100 percent within 24 months.

Employees who are bound by arbitration agreements are deprived of their rights to have their day in court. Litigation in court gives employees an opportunity to have their claims decided by a jury of their peers, not by arbitrators, whose decisions may be affected by business considerations.

If employees and consumers have a way to avoid signing arbitration agreements, it would be smart for them to do so.

The Law Offices of C. Joe Sayas, Jr. welcomes inquiries about this topic. All inquiries are confidential and at no-cost. You can contact the office at (818) 291-0088 or visit www.joesayaslaw.com. [C. Joe Sayas, Jr., Esq. is an experienced trial attorney who has successfully recovered wages and other monetary damages for thousands of employees and consumers. He was named Top Labor & Employment Attorney in California by the Daily Journal, consistently selected as Super Lawyer by the Los Angeles Magazine, and is a Presidential Awardee for Outstanding Filipino Overseas in 2018.]