Arbitration Sucks

  • May 23, 2018

Arbitration Sucks

How the Supreme Court screwed the American worker.

I won’t go as far as some of my colleagues and call this week’s Supreme Court Opinion, Epic Systems Corp. v. Lewis, a sham.  I won’t even call it cynical.  Inducting Ronald Reagan into the Department of Labor’s Hall of Honor?  That’s cynical.  But yesterday’s opinion effectively eviscerating collective worker action through the NLRA was predictable.  And while we’re all focused on Stormy Daniels and the “no-collusion” Russian collusion case, real things are happening behind the scenes of this administration that are truly harming workers.

Let me try to summarize the Lewis decision as best I can. Basically, the Court had to confront two questions which were, in Justice Gorsuch’s own words, “Should employees and employers be allowed to agree that any disputes between them will be resolved through one-on-one arbitration? Or should employees always be permitted to bring their claims in class or collective actions, no matter what they agreed with their employers?[1]

The Court, in a 5-4 opinion, splitting across predictable lines, said yes to the first question and absolutely not to the second.

Here’s an example:  Let’s say a roofing company hires a bunch of roofers. The company intentionally mislabels the roofers as “independent contractors” instead of “employees” so that it can avoid paying workers’ compensation, taxes, benefits, and, most importantly, overtime to these workers.  One of the workers senses something isn’t right after he’s accrued approximately 100 hours of overtime and hasn’t been paid for it. The worker goes to a lawyer and the lawyer rightly counsels him that he’s not an independent contractor but an employee by law and should therefore be paid overtime amongst other benefits.   At the time, the worker is earning $20/hour.  At time-and-a-half, his overtime pay is $30/hour.   Therefore, the employer owes the worker $1,000.00, assuming he’s already paid the worker his normal pay rate of $20 per hour ($30-20 = 10).  $1,000 is good amount of money, but not enough that a lawyer will take his case. However, the roofing company employees 100 roofers and hasn’t paid a dime in overtime to any of them.  Now, the case is worth a $100,000.00.  That gets the lawyer’s attention.

The worker files a collective action suit in federal court for overtime backpay for him and his 99 buddies, but it comes up in discovery that all of the workers signed an arbitration agreement that says the workers must individually resolve any dispute with their employer through arbitration and that they are effectively barred from pursuing litigation.

Despite the existence of the individualized arbitration agreements, can the workers still file a collective action lawsuit jointly or are they bound by the arbitration agreements they signed?

What the workers in the Lewis case argued was that, because the arbitration agreements that were in dispute required one-on-one resolution of wage and hour disputes (as opposed to collective action resolution involving numerous employees), the agreements violated the letter and spirit of collective action enshrined in the National Labor Relations Act (“NLRA”).  As such, they were void if not illegal.

According to the NLRA, federal law is supposed to empower employees with the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection. . .

The foregoing “engage in other concerted activities for the purpose of other mutual aid or protection” wording, workers argued, was what empowered them to pursue class action lawsuits when it came to wage and hour disputes.  And because the wording of the NLRA conflicted with the terms of the individualized arbitration agreements in dispute, the “saving clause” of the Arbitration Act voided such agreements.

The Court said, “nope” and held that the Arbitration Act says that arbitration agreements providing for individualized proceedings in wage disputes must be enforced, and that neither the Arbitration Act’s saving clause nor the NLRA suggested otherwise.

Employers: 1.  Workers: 0.

So, now, if an employee signs an arbitration agreement stipulating to one-on-one resolution of wage (or any other) dispute, that employee must go through that proceeding.  And he or she is permanently bound by those results.  No appeal.  No recourse.

It shouldn’t surprise you that the most business-friendly Supreme Court in history found in favor of the employers in the Lewis case.  That, again, was predictable.  What should surprise you are the outcome disparities in arbitration proceedings versus employment litigation.

In a 2011 report by Cornell professor Alexander Colvin titled, “An Empirical Study of Employment Arbitration: Case Outcomes and Processes,” Professor Colvin compared employment litigation outcomes to employment arbitration outcomes.

Two key findings that immediately jump out from Professor Colvin’s study are:

  • The employee win rate in arbitration cases is lower than employee win rates reported in employment litigation trials; and
  • In cases won by employees at arbitration, the award amounts were substantially lower than award amounts reported in employment litigation.

Professor Colvin also found that there is strong evidence to suggest the existence of a “repeat player effect” in employer arbitration, meaning that employee win rates and award amounts are significantly lower where the employer is involved in multiple arbitration cases.

Lastly, Professor Colvin’s study data indicated the existence of a significant repeat employer-arbitrator pairing effect in which employees on average have lower win rates and receive smaller damage awards where the same arbitrator is involved in more than one case with the same employer.

And because the mean arbitration fees were $6,340 per case studied overall, employers no doubt save money in expensive trial litigation fees which often reach into the tens of thousands of dollars in a federal collective action wage dispute case.

In other words, arbitration sucks for workers.  I said it, not Professor Colvin.  And it’s no wonder that employers make their employees sign individual arbitration agreements at the outset of their employment.  Lower awards, faster resolution times, lower legal fees, higher win rates.  For employers, arbitration agreements are a no-brainer.  For workers, they’re a losing prospect.

Mark my words: we’ll start seeing a lot more arbitration agreements and other agreements further restricting and diminishing workers’ rights in the future.  And with more agreements will inevitably come more litigation.

If you need advice on an arbitration agreement, or if you’re in need of legal representation at an arbitration proceeding in Colorado, please contact Denver attorneys Jeffry Dougan and Malissa Williams at Marathon Law today.  We’ll go the distance together.

[1]From its first sentence, you can tell this is not going to go well for workers.  As one of my colleagues rightly pointed out, Gorsuch’s first question is predicated on the absurd notion that there is any bargaining parity between the American worker and his employer.