Peter Cappelli: A pushback on mandatory arbitration

By: | March 12, 2020 • 3 min read
Peter Cappelli is HRE’s Talent Management columnist and a fellow of the National Academy of Human Resources. He is the George W. Taylor Professor of Management and director of the Center for Human Resources at The Wharton School of the University of Pennsylvania in Philadelphia. He hosts "In the Workplace" on SiriusXM Channel 111 with Dan O'Meara. He can be emailed at hreletters@lrp.com.

Employers and businesses of all kinds understandably do not like to be sued. It is a time-consuming and expensive process, even if you end up winning. Because of that, defendants often believe that plaintiff lawyers will pursue cases against them even if those lawyers do not think they will win their cases in hopes that the defendants will pay up just to avoid going to court. It is not surprising, therefore, that employers and businesses would do what they can to avoid being sued.

The obvious way to do that, of course, would be to avoid doing anything that would lead to a successful suit against you and to have the documentation available to support it—but other approaches may help as well. Those start with the Federal Arbitration Act of 1925 that made it possible for the parties to agree contractually to have their disputes resolved by binding arbitration and not to take them to court.

See more from Peter Cappelli HERE.

All that sounds like a fine idea; arbitration can be quicker, cheaper and easier than going to court. It surprises many people, including me, to discover how widespread these mandatory arbitration clauses are, especially at work, where as many as half of U.S. employees are now covered by them.

However, mandatory arbitration clauses are not necessarily straightforward. The details in them matter. For example, they can prohibit any kind of lawsuits, including banding together in class-action cases where plaintiffs can spread the costs of bringing a case across many individuals. In 2011, the Supreme Court knocked down a California law prohibiting requirements in arbitration decisions that ruled out class action lawsuits. One might argue that, on the other hand, it is much cheaper for an individual to bring a claim against an employer in arbitration than through a lawsuit, but employers are far more worried about class-action lawsuits than individual lawsuits. That’s likely because the potential liability of the employer is so much greater in class-action suits and, second, the resources that plaintiffs have in those class-action suits is also greater.

Arbitration clauses can also limit the ability to involve lawyers in the process, which shifts the advantage to those who already know what they are doing, most likely the employer whose HR people have expertise in dealing with arbitrators. Finally, the ability to retaliate against an employee bringing claims against the employer is far greater in an arbitration context than in a legal proceeding.

The fairness argument behind contracts of all kinds rests on the notion that we do not have to sign them if we do not like them. The problem with mandatory employment contracts is that, if employees do not sign them, they cannot get the job—and, if current employees do not sign them, they cannot keep their job. So, the power is not equal between employer and employee from the start.

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In February, a California appeals court ruled against the DoorDash home-delivery service, which had required that its contractor drivers sign mandatory arbitration clauses that, among other things, prohibited them from bringing class-action lawsuits against DoorDash.  Roughly 5,100 DoorDash workers had brought arbitration claims against the company, contending they should actually be employees, not contractors. The court required that DoorDash actually had to carry out those arbitration cases, one at a time (which the company balked at doing) and pay the arbitrator roughly $2,000 per case to do so.

It was not a coincidence that more than 6,000 DoorDash drivers initially filed those claims all at the same time. It might well have been cheaper and simpler for the company to litigate a class-action case, but now they are stuck with their agreement.

It will be interesting to see if DoorDash and other companies change their mandatory arbitration agreement to avoid this situation in the future. If so, it will be even clearer that these agreements have nothing to do with fairness or efficiency. They are just a way to reduce the costs that they face from employees exercising their legal rights to complain.