Written by Brian Koegle, Founding Partner
UNDERSTANDING ARBITRATION’S DOWNSIDES FOR EMPLOYERS
After examining why California employers need standalone arbitration agreements and how class action waivers protect against representative litigation, we must address the uncomfortable truth: arbitration agreements create significant costs and risks for employers. A balanced decision requires understanding both sides.
Bearing the Financial Burden
Under California law and the requirements established in Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, employers must pay all arbitration fees and costs that exceed what the employee would have paid to litigate in court. Since court filing fees rarely exceed $1,0 00, employers effectively bear the entire cost of arbitration.
These costs accumulate quickly. Arbitrator fees typically range from $500-$800 per hour, with even straightforward employment cases requiring 20-40 hours of arbitrator time for hearings, awards, and case management. A single arbitration can easily cost $35,000-$70,000 in arbitrator fees alone, before accounting for attorney’s fees, expert witnesses, court reporters, and exhibit preparation.
Compare this to defending litigation in court, where the employer pays only their own attorney’s fees and costs. The court system, funded by taxpayers, provides the judge, courtroom, and infrastructure. In arbitration, employers fund the entire dispute resolution system.
For financially stable employers facing high-stakes claims, these costs may be worthwhile. For small businesses with limited resources, a single arbitration can strain budgets significantly.
The Multiple Arbitration Risk
Here lies a critical irony: the class action waiver that protects employers from massive collective litigation exposure creates risk of multiple individual arbitrations. If a payroll practice error affects 50 employees, the employer potentially faces 50 separate arbitrations rather than one class action.
In Johnmohammadi v. Bloomingdale’s, Inc. (2023) 87 Cal.App.5th 874, the court enforced arbitration agreements requiring the employer to arbitrate claims from 289 employees individually. While each arbitration involved lower stakes than a class action, the cumulative costs—both financial and administrative—proved staggering.
Consider wage and hour violations involving improper meal break practices affecting 100 employees. Each employee’s damages might total $5,000-$10,000, making class action settlement economically rational at perhaps $750,000-$1,000,000. However, if 40 of those employees demand individual arbitration, the employer faces:
– Arbitrator fees: 40 cases × $20,000 average = $800,000
– Defense attorney fees: 40 cases × $25,000 average = $1,000,000
– Total: $1,800,000 plus potential liability
The math doesn’t always favor arbitration, especially when dealing with systemic wage and hour issues affecting multiple employees.
Moreover, the administrative burden becomes overwhelming. Managing 40 simultaneous arbitrations—coordinating schedules, responding to discovery, preparing for hearings—diverts management attention from business operations. HR personnel spend months organizing records, sitting for depositions, and preparing testimony across multiple proceedings.
The Truncated Process
Arbitration’s efficiency—often touted as a benefit—cuts both ways. The streamlined process limits discovery, shortens hearing times, and restricts motion practice. For employers with strong defenses requiring extensive factual development, these limitations prove problematic.
California’s wage and hour laws often turn on detailed factual questions: Did the employer provide meal breaks? Were employees properly classified? Did managers approve overtime? In court, employers can conduct thorough written discovery, take multiple depositions, and file dispositive motions based on developed records.
Arbitration compresses these opportunities. Most arbitrators limit depositions to key witnesses, restrict interrogatories and document requests, and prefer hearing disputed facts at arbitration rather than resolving them through summary judgment. An employer who needs extensive discovery to demonstrate compliance faces constraints.
Additionally, arbitration awards receive extremely limited judicial review. Under California Code of Civil Procedure § 1286.2, courts can vacate arbitration awards only for fraud, corruption, or exceeding the arbitrator’s powers—not for legal or factual errors. An incorrect arbitration award, even one clearly contradicting California law, stands with minimal recourse.
Making the Strategic Choice
Employment arbitration agreements aren’t universal solutions. They require careful cost-benefit analysis based on your specific business circumstances:
– Companies with strong compliance practices and limited systemic issues benefit most from class action waivers
– Businesses facing high-stakes individual claims (discrimination, wrongful termination) may prefer arbitration’s privacy and efficiency
– Employers with known widespread compliance issues might face greater costs from multiple arbitrations than from class litigation
– Small businesses must weigh arbitration costs against their operational budgets
The decision to implement arbitration agreements should follow consultation with experienced employment counsel who understands your business, workforce, and compliance profile. When properly deployed, arbitration agreements provide powerful protection. When inappropriately used, they create unexpected costs exceeding the risks they were meant to manage.
Brian Koegle is the founding partner of Koegle Law Group, APC, a boutique litigation firm specializing in employment law counseling and litigation throughout California.
Contact Koegle Law Group to schedule a consultation and get clarity on how we can help guide your business the right way.
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LEGAL DISCLAIMER: This article is provided for informational purposes only and does not constitute legal advice. The information contained herein is general in nature and may not reflect current legal developments or address your specific situation. Readers should not act upon this information without seeking professional legal counsel tailored to their individual circumstances. For specific legal advice regarding employment arbitration agreements or California employment law matters, please consult with a qualified employment law attorney.