As a business owner or HR manager, would a class action lawsuit from employees threaten the stability of your balance sheet? Some of the most likely sources of class action suits from employees are wage and discrimination actions. Most small and medium sized enterprises don’t have the budget to handle the expense of a large class action lawsuit, and sufficient insurance is rarely purchased or available so a strategy to prevent such claims is time well spent.
Arbitration clauses in employment agreements might prevent the burdensome costs of litigating class actions, and help avoid catastrophically large jury settlements.
The recent Supreme Court decision Epic Systems v. Lewis confirmed that employment agreements requiring individual arbitration of disputes, which effectively prevent a class action lawsuit by employees in most circumstances, are enforceable. This decision confirms mandatory individual arbitration clauses as a key strategy to protect businesses from potentially devastating class action suits on behalf of employees.
Arbitration isn’t always better for employers than litigation. Arbitration may help an employer avoid very large judgments by juries, but it’s no guarantee that it will always result in a more favorable result for the employer especially in smaller claims.
Here are some important considerations for Employers:
Potential benefits to binding individual arbitration:
· Lower costs of disputes than litigation
· Avoid potentially large jury awards resulting from a class action
· Arbitration usually resolves disputes much more quickly than litigation
· Arbitration can be kept confidential
Potential risks to requiring binding individual arbitration:
· An unfavorable decision by the arbitrator is not usually appealable, while very unfavorable decisions by juries are often appealed by Defendants.
· Small claims may be brought more often due to the lower cost of arbitration for both parties
· Many employment claims are settled early in the process avoiding the costs of litigation, while submitting to arbitration may actually incur greater costs than an early settlement
· The Arbitration Agreement must also meet the basic requirements of enforceable contracts to be enforced. This means it’s possible that the agreement, or the way it is presented to the employees may make it unenforceable even though arbitration agreements are enforceable in general.
Mandatory individual arbitration clauses are not the best course of action for every business and could result in higher costs of small claims. If your business is exposed to the risk of 10 or more employees bringing wage or discrimination claims, a mandatory individual binding arbitration clause in your employment agreement may be a tool to protect against a more catastrophic class action suit.
Business owners should evaluate their own risk from a potential class action employment related suit and should consult competent legal counsel as well as their risk management professional to determine the best course of action to protect the business. Usually a combination of stronger employment agreements and insurance will provide the best protection.
Aleckson Insurance has substantial experience advising small and medium sized businesses of all types in reducing and financing risk through improvements in employment agreements as well as affordable insurance protection from many employment related claims.
-Eric Swanson JD