Can't We All Get Along?
As litigation costs rise, more businesses turn to arbitration.
Published June 2005
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COMMENT ON THIS ARTICLENothing can damage a company like a lawsuit. For employers, litigation spells steep legal bills and sleepless nights. For staff members, drawn-out disputes can be distracting and divisive. And when a lawsuit stems from inflammatory claims, such as sexual harassment, the publicity can ruin a company's reputation.
Lawsuit nightmares are becoming a reality for more business owners these days. Employment disputes represent one of the fastest-growing segments of cases in the U.S. court system, according to Samuel Estreicher, a professor of labor and employment law at New York University's School of Law. Meanwhile, legal fees are skyrocketing. It costs $100,000, on average, to defend a case in court, according to some estimates.
In an effort to avoid the courtroom -- and stay off the local news -- some companies are requiring their employees to arbitrate disputes with a neutral third party. Corporations like Hallmark and Anheuser-Busch have been arbitrating disputes with employees for years. Now, some small and medium-size businesses have begun to follow suit, says David Gibbs, an employment lawyer at Boston law firm Bowditch & Dewey. In some ways, he says, they have even more at stake than their corporate counterparts. "Lawsuits can wreak more havoc on a smaller company," he says.
Dan Henderson, founder and CEO of Summit Products, a toy company based in Trussville, Ala., asked his employees to sign an arbitration agreement last year after hearing a lawsuit horror story from a fellow business owner. Back in 1997, Summit Products almost folded after the company's first offering -- an educational toy called the Allowance Kit -- struck out with consumers, forcing Henderson to suspend payroll for eight months. Last year, the toy maker was on a roll, with more than $8 million in sales, and the last thing Henderson needed was a costly lawsuit. Saving money wasn't Henderson's only motivation. He had a good relationship with his 21 employees, and he planned to keep it that way. By eliminating the possibility of lawsuits, Henderson hoped to encourage amicable resolutions to problems that could arise as his company expanded. "We're growing so fast," he says. "Arbitration might be necessary at some point."
To be sure, arbitration can be just as pricey as a lawsuit, depending on how long it takes and how much, if anything, employees are awarded. Arbitrators -- usually retired judges or lawyers -- charge between $800 and $1,000 a day, on average. Many employers pick up the bulk of the tab -- which could total as much as $20,000 -- to avoid seeming unfair in the eyes of workers and the law. Employees, on the other hand, typically pay a nominal filing fee of about $150; in most cases, both sides pay for their own legal representation.
Communication is key to a successful arbitration policy. If you're clear about the agreement with your employees, they're more likely to accept it willingly and less likely to dispute it later on. Henderson, for instance, held a meeting with his staff to explain how arbitration could help them resolve problems quickly and amicably. Then he explained how the process would work: If a dispute arose, an employee would first try to resolve it with a manager. If they couldn't reach a resolution, the employee could then request a meeting overseen by a mediator and attended by both parties and their lawyers. The last resort would be an arbitration by a lawyer or judge, whose decision would be binding. To keep the process moving, many companies establish reasonable time limits for each step; for example, a policy might stipulate that the arbitration hearing occur within 90 days of the selection of an arbitrator.
A multistep approach like Henderson's is a smart move, according to Gibbs, because it encourages regular communication. "In many instances, all an employee needs is to be heard and to discuss a problem constructively," he says. Lawsuits, on the other hand, tend to do just the opposite: Once a claim is filed, both sides are encouraged by their lawyers to clam up until the case is settled.
