The benefits and burdens of arbitration.

Carefully designed arbitration agreements and procedures can take advantage of the technique's speed and cost savings, while minimizing potential drawbacks.

In recent years, the number of employment-related lawsuits has skyrocketed. New laws such as the Family and Medical Leave Act and

the Americans with Disabilities Act have created greater protections for employees. In addition, courts have expanded the rights of employees by recognizing numerous exceptions to the doctrine of employment-at-will. The recent flood of litigation has resulted in higher costs for employers as more time and money are spent defending employment-related claims. Consequently, companies have begun to look at new methods of resolving employment disputes.

Arbitration, a type of alternative dispute resolution, can be an attractive alternative to litigation for resolving employment disputes. Arbitration has many advantages. First, disputes are resolved more quickly than in the court system. While litigation often continues for years, arbitration proceedings usually conclude within months. Second, arbitration generally costs less than litigation. Speedier resolutions help in lowering the costs, and because the scope of discovery is more limited in arbitration proceedings, costs associated with court cases, such as multiple depositions, are eliminated or reduced. Third, arbitration avoids the risk of erratic jury verdicts and awards. Employment cases often are tried before juries, whom many experts believe may have a tendency to side with employees. Finally, arbitration proceedings, especially in their early stages, can be kept confidential. Confidentiality provisions in arbitration agreements protect companies and employees from public disclosure of damaging - and, in many instances, false-allegations.

DRAWBACKS OF ARBITRATION

Despite the above benefits, arbitration is not a panacea for all of the ills associated with litigation. Some disadvantages should be considered before adopting an arbitration program.

For example, because of the benefits they gain, including confidentiality, reduced costs, and quicker resolution, employees may be more likely to assert claims against their employers under an arbitration scheme than if they were forced to file a lawsuit. In fact, employees may be encouraged to challenge even the most minor decisions or practices of their employers. As a result, the time and money spent on arbitration could outweigh the costs of litigation.

In addition, arbitration schemes may, in effect, lead to the delegation of management decision-making to third parties. With arbitration proceedings, each time an employee challenges an employer's decision, the arbitrator decides the appropriateness of that decision. Finally and significantly, the results of an arbitration proceeding are difficult to challenge in court. Arbitration awards are usually not appealable, even if the decision-maker misapplied the law.

WORKPLACE ARBITRATION

Although arbitration has received a great deal of attention in recent years, it is not a new concept. The Federal Arbitration Act (FAA), which requires federal courts to enforce arbitration clauses in contracts, was passed in the 1920s. Arbitration has long been a favored method for settling labor disputes. However, it was not used to resolve employment-related cases outside the union setting because it was not considered acceptable for other types of disputes.

The U.S. Supreme Court's 1991 decision in Gilmer v. Interstate/Johnson Lane Corp. allowed arbitration to be used in the employment arena. The Court said arbitration could be an appropriate method for handling claims asserted under federal anti-discrimination laws.

In Gilmer, the Court said the FAA compelled enforcement of the arbitration clause in an employee's application for a securities license with the New York Stock Exchange. The employee was required to obtain the license as a condition of his employment with a securities firm, but the employer was not a party to the licensing agreement. The licensing agreement provided that the employee would arbitrate "disputes arising out of employment."

The employee filed a claim against his employer under the Age Discrimination in Employment Act (ADEA). The Court determined that nothing in the text or legislative history of the ADEA precluded arbitration, and enforced the arbitration clause in the licensing agreement. Although Gilmer opened the door for arbitration of employment discrimination claims, an important issue remains.

The FAA, on which the Gilmer opinion was based, has a provision stating that it does not apply to "contracts of employment of seamen, railroad employees, or any other class of worker engaged in foreign or interstate commerce." The Supreme Court specifically declined to rule whether this exemption applies to all employment contracts. If read broadly, the exclusion would render arbitration clauses in most employment contracts unenforceable.

ESTABLISHING A PROGRAM

Before establishing an arbitration procedure, employers should consider three issues.

* Do the advantages of compulsory arbitration outweigh disadvantages? Assess specific needs and goals to decide whether arbitration is the right choice for your workplace.

* Where will the arbitration clause appear? Arbitration clauses incorporated in employment contracts may not be enforceable under the FAA. The clauses should be in separate agreements in which the employer and employee mutually promise to arbitrate employment-related claims. Employees who waive their right to sue for civil rights violations should receive valuable consideration for their promise, or a court may refuse to enforce the agreement.

* Finally, what elements must be included in the procedure? Among the considerations discussed below, fairness is of primary importance. An unfair program may be subject to a court challenge that could render the arbitration agreement unenforceable.

Establishing fair procedures. In keeping with the fairness requirement, companies should consider providing the same remedies under the arbitration program that employees could obtain if they went to court. Judges are more likely to invalidate arbitration agreements that place noticeable restrictions on employees' recovery. In addition, employees should be permitted and encouraged to seek legal representation. Courts will certainly question the fairness of an arbitration procedure that permits the company to be represented by a lawyer, but requires employees to face the process alone.

Time limits. The time limit for asserting a claim is one of the most significant considerations in developing an arbitration procedure. Companies are disadvantaged by long statutes of limitations, as their witnesses often do not recall relevant circumstances years after an event occurred. An arbitration program should establish a limitations period that grants employees adequate time to realize what has happened and file a claim, but allows the employer to respond to the claim while those involved remember pertinent facts.

Burden of proof. Another important factor is the burden of proof. Companies should make it clear that the party asserting the claim has the burden of proving it. Otherwise, confusion may cause the burden to fall on the employer, forcing it to demonstrate in each arbitration proceeding that its actions were justified.

Types of claims. Finally, employers should define the types of employment actions covered by the arbitration agreement. Although some companies restrict their arbitration process to discharge claims (eliminating the risk of having to arbitrate the most minor of disputes), some of the most costly lawsuits involve circumstances unrelated to discharge, such as sexual harassment cases. Consider the overall goals of the program when deciding what claims to cover.

Arbitration and other forms of alternative dispute resolution can provide numerous benefits to both employers and employees. But if not implemented with careful consideration and planning, the programs may not live up to expectations. To avoid problems, companies interested in new methods of dispute resolution should seek legal advice from an experienced professional.

Theresa Donahue Egler is a partner in the labor and employment law department of Pitney, Harding, Kipp & Szuch, which has offices in Morristown, N.J., and New York City. Firm associate Susan R. Kohn contributed to this article.