Lawsuit Prevention for Employers

Introduction

As readers of this publication are aware, the author recommends mandatory, legally-enforceable arbitration policies to his law firm’s employer-clients. The reasons are summarized as follows.

First, in the absence of an enforceable, written, arbitration policy, employers will be forced to defend a lawsuit in a jury trial. The problem is that California juries are overwhelmingly comprised of employees, as opposed to business owners or managers. Available statistics indicate that employers fare very poorly before juries.

Perhaps more importantly, very few small employers can afford to finance their defense through a jury trial, regardless of the merits of their case.   This is because defense costs for the employer, alone, now frequently approach or exceed a million dollars through trial, exclusive of appeals.

Plaintiffs’ lawyers are keenly aware of this dynamic, and plan to simply “wait out” the employer, knowing that its eventual recognition of this unyielding fact will ultimately force its capitulation to a generous settlement. Why? Agreeing to the plaintiff’s settlement demands is the employer’s only means of escaping the crushing cost of defending a lawsuit through trial.

This simple fact of life has pernicious and corrosive ramifications in the contemporary workplace. Employers who face economic ruin at the hands of the litigation process itself are understandingly tentative about administering necessary disciplinary action, especially terminations, for fear of triggering a solvency-threatening lawsuit. As a result, marginal (or worse) employees are retained, and workplace misconduct goes uncorrected.  This process, unless it is arrested, is readily recognizable as incremental suicide for any employer.

Mandatory, enforceable, arbitration policies effectively neutralize all of these problems. This is because the simplified procedures common to arbitration result in the resolution of disputes much faster, and at a fraction of the cost, required by the traditional civil litigation process. The cost savings for employers have been estimated by some experts to approach 90 percent, when compared to the defense costs incurred through trial in a traditional civil litigation context.

Background

However, to benefit from the arbitration process, employers are required to distribute detailed, legally-enforceable arbitration policies to employees in writing.  This must be done in accordance with very specific procedures, which typically require the expertise of a labor lawyer specializing in management-side employment law.

Most employers who have conducted a cost-benefit analysis quickly recognize the soundness of the investment.  There are several important requirements that must be complied with in order for an arbitration agreement to be legally-enforceable, and these are constantly changing due to the incessant challenges to workplace arbitration asserted by plaintiffs.

For example, arbitration policies cannot reserve rights for the employer that are unavailable to the employee initiating a legal dispute, without rendering the policy unenforceable as legally “unconscionable.”  Similarly, the cost of arbitration generally cannot subject employees to expenses that they would not incur in normal civil litigation.  There are many other requirements.

For example, a California appellate  court recently held that an employer’s failure to provide employees with a copy of applicable arbitration rules renders an arbitration policy unenforceable.

In Carbajal v. CWPSC, Inc. (2016) 245 Cal. Ap. 4^th 227, the employer filed a motion to compel a former employee to arbitrate her claims pursuant to an agreement to submit all employment-related disputes to arbitration.

The employer, CWPSC, operated a residential painting business. The employer hired college students as “interns” to promote its business and to manage painting crews.

When the plaintiff interviewed for her job, the company required her to sign a standard employment agreement, which included an agreement to arbitrate disputes in accordance with the rules of the American Arbitration Association (“AAA”).

Approximately a year after leaving this job, the plaintiff filed a proposed class action lawsuit alleging claims for unpaid wages, missed meal periods, missed rest periods, illegal deductions from wages, improper wage statements, uncompensated business expenses, failure to timely pay wages upon separation and unfair business practices.

When CWPSC filed a motion to require arbitration of the plaintiff’s claims, she argued that the arbitration policy was procedurally and substantively unconscionable, in part because she was never provided with a copy of the applicable AAA rules. The Court agreed, noting that the employer failed to provide a copy of the AAA rules when the agreement was signed, or at any time thereafter.

The Moral

As a result of this decision, employers should carefully consider distributing copies of the rules applicable to any arbitration process they hope to enforce.  More generally, employers interested in maintaining enforceable arbitration policies should have them reviewed for legal sufficiency annually to be sure that the constantly changing rules applicable to such policies are scrupulously complied with.

As the saying goes, “An ounce of prevention is worth a pound of cure,” or a million dollars in defense costs.

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Jay G. Putnam is a Petaluma labor lawyer who has specialized in representing California employers for over three decades. His practice is devoted to preventing lawsuits against his clients, without sacrificing workplace authority or management prerogatives.

While no one can guarantee a future free of lawsuits, Putnam has compiled a remarkable record of success: Not one employer-client has been sued in 36 years with his system of precautions in place.

For those clients who have arrived with pending lawsuits, Putnam has established an excellent track record of success as well. 

You are invited to visit Mr. Putnam’s website, where you will find in-depth discussion of the most common mistakes made by California employers, and how to avoid them. www.jaygputnam.com/articles-by-jay-g-putnam/