Corrections or additions?
This article by Kathleen McGinn Spring was prepared for the May 16, 2001 edition of U.S. 1 Newspaper. All rights reserved.
Employment Contracts: The Push for Arbitration
Liz Zuckerman, an attorney with offices at Princeton
Pike Corporate Center, recently negotiated a $1 million settlement
for a client who alleged that conditions on his job had made him miserable.
"He was a young white male," Zuckerman says. "He was perceived
as being gay, even though he wasn’t. He was harassed unmercifully
by co-workers and supervisors. Really egregious stuff." As a result
of the teasing, the young man developed a stress disorder. He was
then teased about that, too.
Through extensive legal discovery, Zuckerman was able to establish
that management not only knew of the harassment, but took part. This
was enough to persuade the employer to hand over the seven-figure
settlement. This would not have happened had the dispute gone to arbitration,
she says, citing employers’ fear of huge jury verdicts and of extensive
discovery as powerful incentives to settle before cases come to trial.
If her client had not had access to the legal system, she is sure,
he would not have been handed a $1 million settlement.
It is likely that from now on fewer workers will walk away with a
settlement like this — or indeed with any settlement at all —
and that more employers will sleep easy, free from the pressure to
either settle or risk a multi-million dollar jury award. This is so
because the U.S. Supreme Court has ruled that the Federal Arbitration
Act (FAA) applies to all employment contracts, with the exception
of "seamen, railroad employees, or any other class of workers
engaged in foreign or interstate commerce." An employee who signs
an agreement stating that he will submit any disputes with his employer
to binding arbitration has given up his right to sue in court, even
for alleged discrimination.
This ruling was handed down in late March in Circuit City Stores v.
Adams, a case wherein one Saint Clair Adams claimed co-workers harassed
him because he was gay. He sued his employer under California’s Fair
Employment and Housing Act. The 9th Circuit Court of Appeals allowed
his suit to go forward, despite the fact that he had signed an agreement
to submit all employed-related disputes to an arbitrator as part of
his application for the job. The Circuit Court held that the FAA did
not cover employment contracts and that the claim involved Adams civil
The Supreme Court, in a five to four decision, disagreed, holding
that the FAA does cover employment contracts. Further, the court,
however narrowly, came down on the side of binding arbitration of
employment disputes, finding it has "real benefits," including
"avoidance of litigation costs" in the employment context.
In a vigorous dissent from the ruling, Justice Stevens stated that
Congress never intended the FAA, an act drafted in 1925, to require
arbitration in employment disputes. Further, Stevens argued, Congress
has exempted contracts of employment from mandatory arbitration because
of "the potential disparity in bargaining power between individual
employees and large employers."
While attorneys who represent employers tend to applaud the Supreme
Court ruling, attorneys who bring suits for aggrieved employees tend
to agree with Stevens. They contend that slipping an arbitration clause
into an employment application or a handbook and then holding an employee
to it, no matter what the nature of his claim against his employer,
is not only unfair, but also, in many cases, contrary to the intent
of New Jersey laws that bar discrimination. Zuckerman is one such
attorney. A graduate of the University of Michigan (Class of 1985),
who holds a J.D. from the University of California, she was with Mason,
Griffin and Pierson before she and a colleague, George Fisher, formed
Zuckerman & Fisher, which specializes in representing employees.
No matter what their view of the Supreme Court decision, attorneys
agree its impact will be significant. An estimated 20 to 25 percent
of all civil cases in New Jersey courts involve employment disputes,
which cover everything from alleged hiring violations through post-termination
issues, including violations of employee agreements not to divulge
"Age discrimination is very big now," Zuckerman says. She
suspects that some employers are using layoffs occasioned by a slowing
economy as an excuse to "get rid of older workers." Gender
discrimination provides a large number of cases too, as does disability,
whistle blower disputes, contract issues, and, she says, there’s always
sexual harassment. "With all the publicity, your intuition tells
you sexual harassment couldn’t possibly still be an issue," she
says. "But it is."
The amount employers spend on these cases is not known. Only five
percent of all employment suits reach the courts, and the terms of
settlements are almost always private. Richard Mariani, a Morristown
attorney who has been defending employers for 27 years, says it costs
about $100,000 to defend a case that does not make it to trial. Low-end
attorneys fees for a simple case that is tried run from $100,000 to
$150,000. At the other end of the scale, the tab for a complex case
involving significant employment issues can run to $800,000 or $900,000.
On top of that, of course, is the amount of any jury award. According
to a study by Mariani’s firm, Stanton, Hughes, Diana, Cerra, Mariani
& Margello, employees won 68 percent of the time in cases against
employers during the seven years ending last May 15. In 1993, employees
won 100 percent of the time. The average plaintiff’s award during
the entire period was $1,019,448, and hit a high of $3,031,587 in
The report states that "plaintiffs trying their employment discrimination
suits in a New Jersey court face favorable odds of being awarded substantial
damages by a jury." These damages may consist of some combination
of lost wages, emotional distress, and punitive damages. Of the three,
punitive damages is the one that is likely to hurt the most. Mariani
says most plaintiffs throw in emotional distress, but "it won’t
be big money." Plaintiffs tend to say "`I’m very sad. I couldn’t
concentrate. I had an upset stomach.’ They hire a psychiatrist who
says they have post trauma syndrome. But juries and arbitrators can
figure out how hurt they are."
"Punitive damages is the big one," Mariani says. "I tell
employers that juries award punitive damages in less than half of
the cases and they say `That’s great!’ But the bad news is that if
punitive damages are awarded, they’re going to be huge. The employer
is going to get soaked. In many cases, awards exceed $1 million."
On top of damages and their own attorney’s fees, which, remember,
can approach $1 million, employers are liable for the employee’s legal
fees if the case is brought under an anti-discrimination statue. "The
whole point being," Mariani says, "employers face very significant
exposure in cases that go before juries."
Zuckerman, the attorney who represents employees, agrees: "Any
employer would prefer an arbitration to a jury." The Supreme Court,
she says, "really missed the boat" in stripping the right
to a jury trial from employees. There are two areas in which arbitration
falls short as a remedy for workplace disputes, she says.
One is access to justice at the hands of an employee’s peers. Jurors,
she says, are "Everyman." They can picture themselves being
the next victim. She acknowledges that the jury system is not perfect
and that "some awards are out of line," but adds that "we
have provisions for fixing juries gone astray." Excessive awards
can be sent back for review and verdicts can be appealed "and
The other important right stripped away in arbitration, in Zuckerman’s
view, is the right to extensive discovery, the process whereby each
side can take pre-trial testimony and can demand a wide variety of
documents. These documents can include anything from performance reviews
to phone logs to E-mails between managers, and can range far beyond
records on the aggrieved employee himself, perhaps including performance
reviews of all people in similar positions. Some discovery is allowed
in arbitration, but generally it is limited, and often is restricted
to records involving the plaintiff himself.
Zuckerman says discovery, or the threat of same, is
a powerful incentive for employers to settle, but she adds that it
is tough on the employee bringing the suit, too. Discovery is a two-way
process, allowing the employer to take depositions and to demand documents
from the employee bringing the complaint. Zuckerman says that because
emotional distress is often among the injuries for which plaintiffs
are seeking redress, their medical and emotional state and history
are fair game, as, often, are all aspects of their lives and relationships.
"It’s like a classic rape case," says Zuckerman. "The
victim gets victimized all over again. Suddenly your personal life
is a matter of public record." She says she gives clients "a
real stern talking to" before she takes a case "to see if
they know what they’re getting into."
"Most employees do not sue unless motivated by extremely unfair
treatment," Zuckerman says. Many employment cases, in fact, are
brought under New Jersey laws banning discrimination. Most of the
rest are the result of contract disputes, or claims that an employee
was fired or otherwise disadvantaged because of whistle blower actions
through which he called the company on illegal practices. Zuckerman
has less of a problem in seeing these cases handled through arbitration,
but still finds it hard to believe that the Supreme Court was willing
to yank cases involving discrimination out of the court system in
every instance where an employee signs an agreement to submit claims
The discrimination cases fall under state statutes that were enacted
to protect certain classes of people. While this makes them philosophically
different from contract disputes, and lends social significance, there
is another practical difference. The discrimination cases include
among their remedies the right of plaintiffs to receive court-ordered
reimbursement of their legal fees, while the contract disputes do
not. The discrimination cases, therefore, are often accepted by attorneys
on a contingency fee basis.
A case in which Zuckerman’s firm just won a judgment involves a person
with a condition recognized in New Jersey as a disability, and illustrates
how the court system in general, and the discovery process in particular,
works in employment discrimination cases in the United States, where
employment is "at will." This means that employees can quit
at any time for any reason and that employers can fire any employee
at any time for any reason, even one that is capricious (He always
wears green, and I purely hate green.) The exception is that members
of a protected group can not be denied a job, or a promotion, or be
fired or treated badly because they belong to that protected group.
Employees with protected status include women, members of minority
groups, and people with disabilities.
Jacqueline Tillman, a member of Zuckerman’s firm, handled the case,
in which the defendant — Nelson Communications — has just
filed a motion for a new trial. The plaintiff in the case is John
Scott, a man who became ill with AIDS late in 1994, was discharged
in 1995, and died of the disease in August, 1998. The suit is being
carried forward by his family. The plaintiff was hired in 1988 by
an entity of Nelson Communications, now located at Princeton Pike
Corporate Center, which acts as a high-end temporary agency for pharmaceutical
firms, placing sales reps with them in assignments that can last for
years. Nelson Communications was purchased last year by a French corporation,
Publicis Groupe SA.
Scott was a regional director, supervising several levels of managers
in the Northeast. Tillman says he testified, in seven days of deposition,
that he was openly gay, and all his co-workers knew it, he said, because
of the way he dressed, spoke, and carried himself. People joked about
it, Tillman says, and Scott had no problem with that. His supervisor,
the man who fired him, also was gay, and the two men sometimes spoke
about their sexual orientation.
In the summer of 1994, Scott became visibly ill, looking bad enough
and losing enough weight that co-workers began to ask about his health.
In November of 1994 he was hospitalized for pneumonia. In deposition
testimony, a co-worker said all the talk at the office centered on
whether Scott had AIDS. After Scott left the hospital, he called his
supervisor, saying he was ready to come back to work, but the supervisor
put him off again and again while a young woman who had reported to
him took over his work load.
Late in 1994, Nelson lost a big contract with DuPont, decided it needed
fewer employees, and drew up a list of people to be laid off. Scott’s
name was on the list along with those of four other employees and,
says Tillman, "He believed they had put him on the list because
he had AIDS." The other people terminated along with Scott were
recent hires, one of whom was hired back the next day. The other individuals
were hired back with six months, Tillman says.
Tillman says performance was not an issue. She says that the company
admitted Scott was "as good as we could get." He had been
let go, the company said, because the client liked the young woman
who took over for him while he was in the hospital, better.
Under the employment at will doctrine, that would have been reason
enough to fire Scott. But Tillman alleged the real reason he had been
fired was that the company knew he had AIDS. Not every disease is
considered a disability, but in New Jersey AIDS is such a disease.
Tillman persuaded the jury that management knew of Scott’s illness,
and fired him because of it. The jury rendered a judgment of $265,800
for back pay and compensation, and about the same amount for attorney’s
Tillman says news of Scott’s condition spread through his industry,
he found it impossible to find another job, and died a broken man.
The jury verdict, she says, was a great comfort to his family. And,
if upheld, it may cause employers to think twice about how they draw
up lists of employees to be laid off. But the case also illustrates
some of the drawbacks of using the court system to settle employment
Scott’s case has been in the court system for six years, and, Tillman
says, it could go on for another year or 18 months, perhaps more if
the defendant decides to take it to the Supreme Court.
By contrast, says James Farrell, a partner with Princeton-based
Farrell & Thurman, a firm that represents employers, "arbitration
can be over in six months." That speed is among the reasons Farrell
says arbitration is an excellent forum for employment disputes.
He tells a story about George Washington to illustrate his point.
The first thing Washington did after being named Commander-in-Chief,
Farrell recounts, was to go to Connecticut, where he told soldiers
camped out there that he understood there were a lot of grievances,
and said it was important to get them resolved. Our nation’s father
understood, Farrell says, that such grievances are a distraction.
He contends that corporations also need to get past these disputes
as quickly as possible. And the benefit is not only for the employer
and his managers, but also, Farrell contends, for the aggrieved employee.
"Too often a suit becomes all-consuming," Farrell says. "It
takes on a life of its own." The work of a company gets shoved
aside, and the employee remains in turmoil. "There’s a tremendous
psychological value to letting an employee tell his story," Farrell
says. Under arbitration that story can be told, and a result meted
out, in a fraction of the time it takes to move even the most simple
case through clogged courts.
Where litigation is the only option, some employees are denied any
hearing at all, Farrell says. "If liability is not clear-cut and
there is no insurance coverage, it may be difficult for a plaintiff
to find an attorney to take a case on a contingency fee basis,"
he says. "The attorney will have to look at it and say `maybe
you’ll prevail, maybe you won’t.’" Employment cases can take three,
four, five years, or more, to make it through the courts, and attorneys
who take a case on a contingency fee basis generally see no money
until the end. "It’s a substantial investment of resources,"
The cost of litigation is daunting for employees, especially in contract
cases, where the law does not allow for reimbursement of legal costs,
and, at the same time, it can be ruinous for small businesses. "The
cost of a suit is a significant problem," Farrell says. "Think
of a company with 30 employees and revenues of $3 million. If it gets
in a discrimination lawsuit, and its defense costs go into six figures,
that’s an extraordinary hit."
"I know of companies that have been crippled by law suits,"
Farrell says. "Just because a company is sued doesn’t mean that
it’s guilty. A lot of cases get resolved based on cost."
Arbitration can be a good alternative to the courts, Farrell says.
It can take a fraction of the time and the cost. And it is private,
sparing both employer and employee from laying their souls bare in
a public forum. "If you’re just interested in getting to the heart
of the dispute, here is a way," he says. Farrell speaks in favor
of arbitration not only as an attorney who represents employers but
also as a arbitrator.
Farrell, a graduate of Pace University (Class of 1974), became director
of labor relations for Pan Am while attending St. John’s School of
Law at night in the mid-1980s. In that capacity, he served as an in-house
arbitrator for Pan Am management. Under the federal Railway Labor
Act, labor disputes between many transportation workers and their
employers are subject to arbitration under collective bargaining agreements.
Farrell sat on a panel of four, two representatives from labor and
two from management. Disputes were presented to the panel, and if
there was a deadlock, a federal arbitrator was brought in to break
the tie vote, and the case was heard de novo (from the beginning)
with all five people hearing the case. The system worked so well,
Farrell says, that "We resolved the preponderance of disputes
without the federal arbitrator."
Farrell, who served as an arbitrator before obtained a law degree,
explains that arbitrators do not have to be attorneys, but says that
many are. Others may be former management or union representatives,
or college professors, or even full-time professional arbitrators.
Employees signing an agreement to arbitrate may be asked to agree
to take disputes to a particular arbitration organization. Both sides
generally then are presented with the names of a number of arbitrators
and have the right to turn down some and rank the others in order
of preference. Both sides may be represented by attorneys, and some
discovery is allowed.
Eighty percent of Farrell’s practice consists of counseling companies.
The other 20 percent involves representing high level management,
and includes drawing up employment contracts that can run to 20 pages.
Farrell says agreements to submit disputes to arbitration are often
part of these contracts, and he has no problem with having clients
sign them "if the language is fair and appropriate."
Submitting disputes to arbitration doesn’t automatically mean an employee
signs away rights permitted under the law, Farrell says. Arbitrators
can allow both punitive damages and attorneys’ fees, and employers
may run into trouble if they word their arbitration agreements in
such a way that remedies such as these are foreclosed. The more limitations
employers put on rights an employee would have if the case were to
be tried in court, the less likely it is that their agreements will
Mariani, the Morristown attorney, agrees. "There is a question
whether they (arbitration agreements) will be upheld by the courts,"
he says. "My instinct is that if you as an employer want to create
an agreement that will be upheld by the courts, you shouldn’t even
try to limit the nature of remedies."
Some attorneys and arbitration groups urge employers to make an arbitration
agreement a separate document, others counsel that the agreements
can be included in an application for employment or an employee handbook.
A sample arbitration agreement on the National Arbitration Forum’s
website (www.arb-forum.com/library/employclauses.asp) runs to seven
Some employers’ attorneys, gleeful over the Supreme
Court’s ruling, are urging all of their clients to pass out arbitration
agreements to all of their workers. Farrell and Mariani, seeing arbitration
as ideal in some situations, but not others, are not among them. Arbitration
has its drawbacks, for employers as well as for employees.
"In arbitration, there is an extremely limited right to appeal,"
Mariani says. "Whereas if you go to trial, you have unlimited
opportunities to appeal." Perhaps even more significantly, "In
court you can bring a motion for summary judgment," he says. Employers’
attorneys can often use a summary judgment motion to make claims they
consider frivolous go away. There is no similar mechanism in arbitration.
Another potential mine field employers may encounter in arbitration,
Mariani says, is its relaxed rules on admissibility of evidence. In
a court proceeding, he says, "the employee is always given the
benefit of the doubt in the pre-trial phase, but it’s an even playing
field at trial. The employer counts on this very much in persuading
the jury it did not do anything wrong." In arbitration, on the
other hand, "the rules are of evidence are very relaxed. Everything
goes in, and that could be very significant."
An example of the rules of evidence used at trial is that hearsay
generally is not allowed. Witnesses can only testify to conversations
they actually heard. In arbitration, on the other hand, Mariani says,
a witness can say things like: "My sister’s cousin used to work
for the company, and she said she heard women were never allowed to
run the drill presses."
"This can be huge," Mariani says. "Where an employee really
doesn’t have much going for him, he can bring in all kinds of rumor
and grapevine. From an employer’s point of view, it’s a bad thing."
There are positives for employers in requiring their employees to
sign arbitration agreements, however, Mariani says. Among them are
situations like the one in which Zuckerman, the plaintiff’s attorney,
won $1 million for the young, straight man who was teased for being
gay and then for being a nervous wreck.
"Would employers settle fewer cases? Probably true," he says.
"The fear of runaway verdicts and the cost of litigation are major
when employers assess the appropriateness of settling."
No one really knows how the new Supreme Court ruling will change the
status of New Jersey, as, in Zuckerman’s words "a good place to
be an employee." And there is even some doubt as to whether the
ruling will stand in regard to employees’ claims based on illegal
discrimination. Says Zuckerman: "It’s my hope and gut feeling
that the New Jersey Supreme Court will carve a niche for discrimination
cases to be heard in Superior Court."
Mariani disagrees. "I would be astonished if the Supreme Court
took the position that state discrimination claims are not covered,"
he says. "The game is over."
So, it’s a matter of wait and see, as employers decide whether to
have employees sign agreements to submit all disputes to binding arbitration,
and, inevitably, employees test the legality of specific agreements.
Whatever employers decide, and courts decide to enforce, it appears
there will be no end to job-related clashes, and no perfect way to
resolve them. Of the Supreme Court’s recent attempt to tame the process,
Mariani says, "It’s not a panacea."
Corrections or additions?
This page is published by PrincetonInfo.com
— the web site for U.S. 1 Newspaper in Princeton, New Jersey.