If an employee accuses your company of discrimination and takes you to court, the ensuing battle could take years and cost thousands of dollars. When it's all over, neither side may have much to show for it.

How Arbitration Works

Not all arbitration agreements are alike, but most work like this:

The employee signs a waiver agreeing to arbitrate all potential employment disputes as a way to avoid litigation. In general, this applies to all claims brought under Title VII of the Civil Rights Act, which makes illegal discrimination based on race, color, national origin, sex, sexuality, pregnancy, religion or religious practices; the Americans with Disabilities Act; the Age Discrimination In Employment Act; and any applicable state fair employment laws. Claims filed under workers' compensation laws or the National Labor Relations Act aren't subject to arbitration.

An arbitrator is selected from a panel provided by the American Arbitration Association. The arbitrator first holds an informal session when both parties have an opportunity to air their sides. This often solves the problem. It clears the air and people go away satisfied. But if it doesn't work, the case goes to formal arbitration. Both sides have legal representation and can present evidence and introduce witnesses.

The arbitrator hears the case and makes a decision. That decision is final.

That's why it's a good idea to ask employees to agree in advance to binding arbitration if such a dispute ever arises. Arbitration takes one-quarter of the time and costs one-tenth as much as going to court.

It allows your company to avoid jury trials and makes large damage awards unlikely. Your employees benefit, as well, because arbitration gets them a hearing and equitable treatment without costing them much in legal fees.

While it's an absolute necessity to find knowledgeable legal counsel to create these agreements, there are several things a business can do to make the introduction go more smoothly:

    • Designate a human resources person or someone else who is not seen as one of the bosses to present the plan. Keep senior managers out of explanatory meetings because their presence can intimidate staff. Employees should feel the process is neutral.
    • In small group meetings, explain why arbitration is good for employees and be prepared to answer questions. Emphasize that part of the process involves choosing an arbitrator who is satisfactory to both sides.
    • If someone has serious problems with the issue, schedule a later one-on-one meeting. Don't let the naysayers dominate the group discussion.
    • Don't make this a sign-or-be-fired situation. The best way to handle it is simply to persuade everyone that arbitration is the right thing to do.
    • Make the policy part of your employee handbook. Ask each employee to sign upon hiring or annually signifying that they have read the book and agree to abide by its tenets. You might want to specify: the percentage of fees the employee pays; the type of claims or complaints that are covered; and the rights employees have during the arbitration process.