What UK Companies Need to Know About Mandatory Arbitration of US Employment Disputes

One of the hiring decisions UK companies expanding across the Atlantic must make is whether to require US based employees to sign arbitration agreements under which each agrees to bring employment disputes in private arbitration, foregoing access to the US court system. This is not a common term in UK employment contracts. Accordingly, UK companies may be unfamiliar with how best to approach this decision. Below, we lay out some primary considerations.

Private arbitration is when both parties to a contract voluntarily agree that any dispute that arises between them will be solved by a privately hired arbitrator rather than by the court system. This is a binding choice that can be made before any dispute arises, such as at the time of hire.

There is no one reason why US employers choose arbitration, but there has long been a view that arbitrators tend to be more reasonable in deciding employment disputes than juries in a court system, who are often perceived as biased in favor of employees. In arbitration, parties typically have access to an arbitrator with substantial experience in employment law matters, which will not be true of a jury or even some judges. However, this conventional wisdom should not be the only consideration.

As with most employment decisions, no one approach will work for all companies. Consider the following:

Will it impact recruitment?

Employees in certain industries and roles may be accustomed to agreeing to arbitrate disputes. Some, however, may be skeptical as there is no requirement in the US for there to be an employment contract. Thus, employees may not be accustomed to signing agreements upon hire. Consider your recruits and how they may react.

Does privacy of proceedings matter?

Arbitration is private whereas court proceedings are public. This can be a primary reason employers elect arbitration: to ensure salacious disputes stay out of the public eye. Although there may be some limits to confidentiality, such as concerning allegations of sexual assault, in general arbitration will almost certainly garner less attention than court proceedings.

Does speed of resolution matter?

Arbitration is considerably faster than court processes. This can work for and against employers. On the one hand, it is typically in both parties’ interests to resolve disputes swiftly, allowing the company to focus on critical operational matters. On the other hand, employees can be incentivized to resolve complaints via a compromise agreement when the alternative is the lengthy delay and uncertainty of a court process. Accordingly, agreeing to arbitrate may remove some leverage in settlement negotiations.

How will you pay for private arbitration?

Private arbitration is expensive. Although the process is typically shorter than a court process, meaning legal fees may be slightly lower, it remains a robust and comprehensive process involving conferences, discovery (exchange of information between parties), and a hearing. Legal fees will, accordingly, still be substantial. In addition, employers will have to pay the cost of arbitration (e.g. arbitrator’s fee and other administrative costs), a cost which does not exist in the court system.

Will arbitration be more convenient, including for UK based leaders or witnesses?

Often, private arbitration will allow remote attendance at conferences and in some cases even hearings, which is not typically permitted in court systems. When potential decision makers and witnesses are overseas, arbitration may be more a more convenient forum.

What is the most likely dispute to arise?

Most US employment disputes can lawfully be submitted to arbitration, including claims alleging discrimination, retaliation and pay disputes. However, several years ago the federal government passed a law allowing employees to elect to bring any cases related to sexual harassment or sexual assault in courts, even if an arbitration agreement says otherwise. Although employers cannot predict whether any given new hire is likely to raise a sexual harassment claim, consider your workforce culture and history of any complaints.

In addition, employers who foresee the need to bring their own claims against employees for violations of post-employment restrictions (e.g. non-competes) may prefer to bring those claims in US courts where there is the power to issue immediate injunctions, including against third parties.

Ultimately, whether to require US based employees to agree to arbitrate employment disputes requires consideration of a company’s priorities. Companies that wish to implement a mandatory arbitration program must draft arbitration agreements very carefully to maximize their chance of enforceability under both US federal and applicable state laws. MBM Commercial’s US Team is well placed to assist with this and other US expansion matters.