The Economist Asia - 27.01.2018

The EconomistJanuary 27th 2018 Business 57

I

MAGINE wanting to sue your employer,

because you have been harassed or dis-

criminated against, only to find that your

access to the courts is blocked. It turns out

you signed away your right to use the judi-

cial system when you started the job:

somewhere, hidden in the documents that

came with your employment contract,

was a clause obliging you to resolve future

disputesthrough private arbitration, rather

than in court.

An increasing number of American em-

ployees find themselves in this situation.

Over half of non-unionised employees are

covered by arbitration requirements, esti-

mates Alexander Colvin of Cornell Uni-

versity, based on a survey in 2017 of 627

private-sector workplaces. Such agree-

ments have come under greater scrutiny

after the wave of workplace sexual-harass-

ment revelationslast year. Gretchen Carl-

son, a former news anchor for Fox, a broad-

caster, has called arbitration “the

harasser’s best friend”. Prevented by an ar-

bitration clause from suingthe network,

Ms Carlson sued her boss and alleged ha-

rasser, RogerAiles, instead.

Arbitration was originally designed for

commercial disputes. It has also become a

common feature of consumer services:

Airbnb’s terms of use include them, as do

mobile-phone contracts. But such clauses

increasingly show up in employment con-

tracts, too. Back in the early 1990s, only

around 2% of non-unionised workplaces

used arbitration for employment disputes,

says Mr Colvin. A number of Supreme

Court rulings since then have encouraged

its broader adoption.

The main advantage of arbitration,

compared with litigating in court, is speed:

a decision is reached, on average, a year be-

fore one is made in court. Instead of com-

plicated legal procedures, the parties in-

volved call in a neutral third person, often

an expert in the industry. The arbitrator lis-

tens to the evidence and makes a decision,

which is binding in most cases.

The popularity of arbitration is a sign of

how very costly and technical the courts

have become, says Andrew Pincus, a

partner at Mayer Brown, a law firm, who

advises companies on such procedures.

Signing up to arbitration in advance, he ar-

gues, does away with jockeying for legal

advantage over where the case is best

heard, which almost always keeps the par-

ties from settling. And it allows employees

to make claims that would be too small to

justify a suit in court.

Others argue that arbitration is ill-

suited to employment disputes. In many

cases, it and its terms are in effect imposed

on employees, says Imre Szalai of Loyola

University in New Orleans. New recruits

may not look at the small print, or think it

will ever apply to them. “It is a fantasy of

consent, rather than the real thing,” says

Katherine Stone at University of Califor-

nia, Los Angeles.

Another concern is that the process of

arbitration favours employers. They often

pick the firm of arbitrators. And individual

arbitrators are more likely to encounter the

employer than the employee in future

cases. Both features may lead the arbitrator

to be unconsciously biased towards the

employer, says Victoria Pynchon, a former

arbitrator with the American Arbitration

Association (AAA), who now runs She Ne-

gotiates, a training and consulting firm.

In some cases, biases are explicit. Ms

Pynchon was warned at the start of her ca-

reer that awarding punitive damages

against employers could mean she would

never arbitrate another case. Large arbitra-

tion groups, such as the AAA,do have

codes of conductthat prohibit such partial-

ity. But Mr Szalai, of Loyola University,

questions whether these counteract im-

plicit biases.

Unsurprisingly, perhaps, recent studies

suggest that outcomes and payouts in arbi-

tration are, on average, significantly less

generous to employees than those made in

court, says Mr Colvin. But comparing arbi-

tration and court cases is not easy: the

terms of arbitration can vary widely, mak-

ing generalising across them difficult.

Another criticism of arbitration agree-

ments, voiced by Ms Carlson, the news an-

chor, is that they silence victims. Often the

proceedingshave confidentiality clauses

attached that prevent the employee from

speaking about the case, thereby protect-

ing repeat offenders. Paula Brantner of

Workplace Fairness, an employee-rights

charity, contends that, without the threat

of litigation and the negative publicity it

brings, companies have less of an incen-

tive to root out bad behaviour.

In the wake of the #MeToo movement,

legislators are now takingaim at arbitra-

tion in harassment cases. A draft bill ban-

ning mandatory arbitration in such cases

was introduced in Congress last month.

Supporters are cheered by the fact that the

bill’s sponsors span both sides of the aisle.

But lobbyists warn that its broad wording

could be construed as banning arbitration

in all workplace disputes. Previous such

proposals have never got off the ground.

Indeed, arbitration’s scope could wid-

en further. One open question is whether

firms can ban employees who are subject

to mandatory-arbitration clauses from fil-

ing class-action suits. The USChamber of

Commerce says such a ban is essential to

avoid needless claims. The Supreme Court

is due to rule before June on whether that

would violate labourrights.

Such a prohibition has already been ap-

proved by Congress in the case of arbitra-

tion in consumer contracts (reversing a de-

cision by the Consumer Financial

Protection Bureau). Firms may even start

slipping arbitration clauses into IPOdocu-

ments, after Michael Piwowar ofthe Secu-

rities and Exchange Commission wel-

comed the idea in a speech last year. The

courtrooms may yet get emptier. 7

Arbitration agreements in America

Kept out of the courthouse

Bosses who behave badly are being shielded by contractual small print

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