Highlights:

• An employment agreement's dispute resolution clause is crucial in determining venue, laws, and litigation costs, but is often overlooked.
• Picking the venue for disputes is critical in any resolution clause. Forums can include courts or arbitration organizations like AAA and JAMS.
• When creating dispute resolution clauses, consider confidentiality, remote vs in-person proceedings, class actions, and employee interests.

There is one clause in your employment agreements that singularly dictates where a dispute between the organization and its employee(s) will take place, under what laws, and potentially how long and costly the litigation may be for both sides. Yet it remains one of the most under negotiated, and frankly ignored, parts of every employment agreement. It has many names, which may include the “dispute resolution clause,” “arbitration clause,” “class action waiver” and many derivations thereof.

This provision can single-handedly maintain amicable employer-employee relationships or destroy them altogether. Additionally, it can mean the difference between spending hundreds of thousands (or millions) of dollars and years in litigation or having capped fees and imposed deadlines that result in quick and efficient resolutions.
 

As a human resources (HR) professional, you simply cannot ignore the importance of this clause in your employment agreements, nor can you take a “wait and see” approach. Once the provision has been invoked, your fate has been sealed.

So what are these provisions, what do they usually look like, and how can you draft them to make sure all parties will be treated fairly and the process will be cost-effective and efficient?

Dispute Resolution Clause: How Does it Come to Be?

It would be remiss to expect that all employer-employee relationships are going to work out. The reality is that, for any number of reasons, employees leave companies voluntarily or involuntarily. And when that happens, there are very often disputes about the rights and responsibilities that both parties have moving forward. If consensus cannot be achieved, it is common for there to be formal disputes about what needs to happen post-breakup.

This is why dispute resolution clauses exist: to define and delineate how disputes will be handled and where they will be filed and resolved.

The most important part of any dispute resolution clause is the selection of the venue(s) that will handle any disputes, should they occur. The most commonly designated forums are state and federal courts, or arbitration organizations, which often tend to be the American Arbitration Association (AAA) and the Judicial Arbitration and Mediation Services (JAMS). There are costs and benefits associated with the choice of courts versus arbitration that will be discussed later in this article.

Now, you may be wondering who actually creates these provisions and how they choose what forum to designate. Well, the simple answer to the first question is usually attorneys. The answer to the second question is more complex because what you will usually find is that the drafting attorney did not put a lot of time and thought into the dispute resolution provision. Instead, at some point he or she developed some boilerplate language for the dispute resolution clause and then used it over and over again without critically thinking about its potential impact. Typically sitting in the back third of the agreement, dispute resolution clauses are often ignored in the drafting of form employment agreements – right until they explode.

Dispute Resolution Clause: What to Consider?

There are vast differences between the different forums you can choose for dispute resolution. It is important that you ask yourself several questions when drafting these provisions, even if you are working with legal counsel.

First, are you concerned about confidentiality? The most glaring difference between selecting state and federal courts and an arbitration provider is that everything that happens in court is public record unless it is sealed upon request. Accordingly, if you do not wish to have your employment disputes in the public realm, you probably do not want to designate the courts.

Second, would you prefer to handle disputes remotely or in person? With the advent of the Covid-19 pandemic, remote proceedings have become not only possible but also often preferable. There are costs associated with in-person proceedings that are both tangible (flights, hotels, etc.) and intangible (being solely dedicated to the dispute while on location, preventing you from working on other matters). If you prefer remote first proceedings, you need to make sure the court or arbitration provider has a fulsome platform for delivering virtually. Otherwise, you may experience a significant amount of pain as they try to cobble technologies together.

Third, are class actions or mass actions a relevant consideration? If so, you need to choose a forum that is capable of handling the volume associated with those types of proceedings, or you need to draft the provision in a way that prevents class or mass actions while still ensuring that you are being fair to your employees.

Fourth, and most importantly, you need to consider the interests of your employees. A happy workforce is almost certainly a more productive workforce, and creating one-sided employment agreements that hamstring your employees is one of the fastest ways to ensure you have a disgruntled employee base. It may even be worth considering an employee task force or working group that can voice the concerns of the employees, making sure that the provisions of the employment agreement account for those concerns, including the dispute resolution clause.

In short, there is a multitude of considerations that may impact the drafting of your dispute resolution clause, many outside the ones discussed herein. The ones listed above are only a sampling. But the lesson is that one size very much does not fit all. These provisions can and should be bespoke to the needs of your organization and employees, and careful thought should be put into how and why you are drafting the dispute resolution clause in a particular way.

How to Choose an Arbitration Forum?

The answer to this question is far more ambiguous, but there are some generalities that can be applied. Although we are now technically clear of the pandemic, its effects will be felt going forward. Courts are no exception to this rule. Litigation slowed to a trickle in many courts during Covid-19, which means that dockets may be backlogged and court staff overburdened. All of this means that, depending on the court, you may face long and inevitable delays before your case can be heard.

From a business standpoint, the longer cases linger, the greater the cost and bandwidth that must be devoted to their disposition. On the employee side, if they are in need of back wages, health insurance coverage, or reinstatement, there are very real damages associated with any delay.

In contrast, while arbitration forums tend to be faster, there remains the consideration of confidentiality. While it may be good for the organization, many people view confidentiality of proceedings as a negative because public opinion on the matter is not available, and precedent is harder to apply to systemic wrongdoing. In court, everything is out in the open. That perhaps is a positive to the organization because if the claims are spurious, it allows the organization to fight them in the court of public opinion as well, which may deter future conduct.

However, the primary considerations should always be fairness, efficiency, speed and cost because a fast, fair, efficient and inexpensive proceeding will almost always benefit both parties. Additionally, if confidentiality is an issue, it can always be waived in a dispute resolution clause that designates an arbitration forum. There is no requirement that arbitration be confidential.

How to Customize Your Dispute Resolution Clause?

Dovetailing off several of the paragraphs above, it is imperative that HR professionals keep in mind that dispute resolution clauses can be customized to the smallest detail to account for the needs and concerns of both the business and its employees.

1. For example, maybe including a mandatory mediation clause prior to any formal litigation makes sense for your organization because there tends to be a fair amount of trust and empathy between the parties.
2. Perhaps your company is organized under the laws of Delaware, and you want to take advantage of the fulsome case law that has been developed over the course of years in Delaware courts.
3. Maybe your company is laden with trade secrets and confidential information that need additional protections built into your employment agreements.
4. Finally, maybe there is voluminous employment litigation at your company, and you need a dispute resolution provider that can handle the volume and be fast and efficient with cases. You need to account for this issue when designating your dispute resolution provider.

Conclusion

Regardless, no experienced HR professional should view employment agreements as simple boilerplate agreements. They need to be carefully considered and drafted with the wants and needs of the organization and its employees in mind. This is particularly true of the dispute resolution provision. So draft thoughtfully, and you will likely prevent a lot of pain and misery for yourself, your organization and your employees down the line.

Author Bio

The Founder and Chairman of New Era ADR, Collin Williams previously served as general counsel for Reverb.com. He spent 11 years as a litigation attorney for Greenberg Traurig, LLP and Butler Snow LLP.

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