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The Surprising Costs of Mandatory Arbitration

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Over the years, the benefits of arbitration versus litigation have been repeatedly touted by employers. With increasing frequency, provisions mandating arbitration of employment-related claims have appeared in employee handbooks or employment contracts. These provisions, which are generally enforced, preclude an aggrieved party from filing a lawsuit and instead require that party to have his or her claims resolved through arbitration.

There are certainly some benefits to arbitration. It is generally quicker and less formal than litigation. But the advantages are often offset by the limited discovery often afforded by arbitration, out of state forum requirements and arbitrators who lack the necessary expertise to determine the merits of the dispute.

While arbitration can be less expensive than litigation, the opposite is often true. In this regard, the filing fee at the American Arbitration Association (“AAA”) — the organization that is often appointed as the administrator of arbitral proceedings — can be prohibitive. These filing fees can exceed $10,000 (depending on the amount sought by the aggrieved party) and arbitrators frequently require advance payment of their estimated fee which can easily drive the initial cost of just starting the arbitration to $20,000 or more. In contrast, a case can be filed in the Circuit Court for Montgomery County for $135.

Who foots the bill for the potentially prohibitive cost of initiating arbitration? Unfortunately, in some cases, a substantial part of this cost is shifted to the employee. In this regard, the AAA will examine whether the dispute arises from an “employer promulgated plan” (i.e. a standardized, company-wide policy) or from a “negotiated agreement” (i.e. a contract that was or could have been negotiated by the parties). For disputes arising out of employer promulgated plans, the current fee schedule would require the employee to absorb only $200 of the filing fee and the employer has to pay the remaining costs of arbitration, including the arbitrator's fee. For disputes arising out of individually negotiated agreements, the employee is required to pay a much higher filing fee (depending on the amount claimed) and one-half of the arbitrator's fee.

Thus, in the case of a $200,000 dispute arising out of a negotiated agreement, the employee would be required to pay a $2,800 initial filing fee, a subsequent filing fee of $1,250 and absorb one-half of the arbitrator's fee (which can often exceed $20,000). In other words, the employee in this example would be potentially required to pay over $14,000 just for the privilege of pursuing his claim in arbitration. Without a mandatory arbitration provision, this same employee could pursue his case in court by paying a filing fee of $135.

While there are some benefits to arbitration, the hidden costs often eclipse these benefits. Sadly, because of these costs, employees with legitimate claims often cannot afford to arbitrate their claims and are left without a remedy.