Legal and Design Issues in Creating an ADR Program
By Stuart H. Brody and Stephen F. Ruffino

In this report we will discuss legal and strategic issues involved in creating an ADR
Program and offer practical suggestions for starting a dispute resolution program. A questionnaire is
attached to help identify the goals of an ADR program, and determine which ADR approach might
best suit your needs.

I.What is Alternative Dispute Resolution ("ADR")?
 
ADR is a term that encompasses a wide variety of procedures. It is readily identified with
arbitration, which has attracted the most attention for a very simple reason: it is usually less costly than
litigation, yet fully determines the rights of the parties concerning the controversy in question. In
addition, arbitration procedures are not a matter of public record.
 
There are, however, other forms of ADR which include mediation, fact finding, ombudsman or
investigators, grievance procedures, peer review and management review boards which are not final
and binding on the parties. Nonetheless, they may offer considerable value to an employer from the
standpoint both of minimizing litigation and enhancing productivity. We will discuss the advantages of
these alternatives so you will have a complete picture of your ADR options.

II.What are the legal considerations in establishing an ADR program?

 As you probably know, the practice of arbitration, and ADR generally, received a boost after the
Supreme Court's 1991 decision in Gilmer v. Interstate/Johnson Lake Corporation, where, for the first
time, the high court required arbitration of a statutory employment discrimination claim. The facts of
the Gilmer case were very narrow—whether a securities broker could be forced to arbitrate his federal
age-discrimination claim simply because he signed a registration application with the New York Stock
Exchange requiring arbitration of all employment disputes. The registration application was not an
employment agreement, nor could the employee refuse to sign and still work in the securities industry.

The Supreme Court swept aside these objections with a broad endorsement of the practice of
arbitration. Subsequent decisions have compelled employers to arbitrate federal race and sex claims in
cases—like Gilmer—involving securities brokers who filed registration applications with the New
York Stock Exchange. Based on Gilmer, appeals courts have also enforced employment agreements
(as distinct from registration applications) that require submission of statutory discrimination claims,
like race and age discrimination, to arbitration.


 


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There appears no reason why arbitration of other statutory claims such as the Equal Pay Act,
Americans with Disabilities Act or the Family and Medical Leave Act would not be similarly approved
by the courts.

In view of Gilmer and federal decisions based on it, it is safe to predict that courts will enforce
employment agreements containing the obligation to arbitrate statutory claims. But there are several
other legal issues that you should consider before deciding upon an ADR program. For instance, will
courts readily enforce obligations to arbitrate non-statutory disputes, such as tort and contract claims?
And, can an employee's obligation to arbitrate be contained in documents other than an employment
agreement, such as an employment application? Can employers require current employees to submit to
arbitration, for instance, by including the requirement in the handbook, or can it compel only new hires
do so? How do the courts treat ADR procedures, such as mediation and ombudsman hearing, that do
not culminate in final and binding decisions? Will Congress or state legislatures intervene to advance or
retard the growth of ADR? Let's turn to these questions.

III.      Will courts require employees to arbitrate issues other than statutory rights?

Other than statutory claims, there are two other broad classes of employment disputes:
(1) contract and common law tort claims such as breach of contract, failure to fulfill promises
contained in a handbook, defamation, negligent hiring, infliction of emotional distress, etc.; and,
(2) commonplace workplace controversies such as improper supervisory treatment, failure to promote
or vindictive performance appraisal, for which there is no redress provided by law without a special
agreement which compels review.
 
Where there is such an agreement, courts have traditionally enforced them. For instance, as in
Gilmer, arbitration may be required by industry practices. Similarly, arbitration is generally required in
collective bargaining agreements. Individual employment agreements, usually for higher-level
employees, typically require arbitration of all employment disputes. Also, as most employers are
aware—often through costly experience—a grievance procedure contained in a handbook may be
construed as a "contract" and enforceable against an employer.

The less settled question, and the one which may concern you the most, is whether an employee
can be compelled to arbitrate based on an arbitration requirement contained in an employment
application or handbook.

IV.      Can employers make arbitration a condition of hire or continuing employment?

Recent state and federal court decisions, together with the Gilmer decision itself, offer strong
support for the conclusion that an employment application is a legally permissible means of binding an
employee to an arbitration requirement. Acceptance of employment is often construed as consent to
arbitration as a condition of employment.

Since an employee's "consent" to arbitration is the foundation upon which enforceability rests,
how is consent demonstrated when arbitration is required in a handbook? The answer is rooted in the
very nature of the employment-at-will doctrine, which allows either party to terminate the relationship
at any time, without notice and without reason. By continuing employment, after being presented with
an arbitration requirement, an employee is deemed to consent to any condition placed on employment.

Accordingly, by continuing his or her employment in the face of a new handbook condition
requiring arbitration, the employee may be deemed to have consented to it. Gilmer strongly supports
this consent theory, since the Court expressly dismissed the argument that "unequal bargaining power"
between employee and employer makes consent impossible. Therefore, there appears no legal
impediment to requiring employees to arbitrate where the requirement to do so is contained in an
employment application or handbook.

V. Will courts accord final and binding effect to ADR procedures that do not culminate in
final and binding decisions?

Although arbitration is the most well-known method of final and binding resolution, there are
others as well. For instance, joint employer/employee boards are regarded as final and binding so long
as they possess the same procedural guarantees of fairness associated with arbitration: e.g., notice of
charges and hearing, right to produce evidence and examine witnesses, and fair selection processes of
the board.

Where procedures used to settle disputes do not result in a final and binding resolution of the
issues, the result of such processes will not be enforced. This means, for instance, that if a company
ombudsman concluded that an employee complaint had no merit, such conclusion would have no legal
weight in court. An example with which you may be familiar is the internal investigation that the law
requires when sexual harassment is charged. Although often comprehensive and highly professional,
the investigation report only serves to show that the employer undertook good-faith steps to resolve
the dispute, but it has absolutely no bearing in court on the merits of the respective claims.

Even if the company hired a neutral fact finder to hear evidence and make a "final and binding"
ruling, such a procedure would likely have no legal effect. As long as the company had exclusive
control over selection of the fact finder, a court would find lacking the necessary guaranties of
neutrality upon which a finding of final and binding status depends.

This does not mean, however, that courts will refrain from requiring employees to submit to
investigation or mediation procedures. Courts will enforce grievance and fact-finding policies against
employees just as courts have required employers to adhere to such procedures "promised" in a
handbook. The result, although not necessarily binding on the parties, may nonetheless be very valuable
in diffusing workplace disputes and promoting communication between management and its
employees. We now turn to a discussion of these and other practical issues in designing an ADR
program.

VI.  What ADR design will best effectuate company goals?

ADR offers employees an opportunity to achieve a redress of grievances to which they otherwise
would not be entitled. Before relinquishing the autonomy over employment decisions it currently has,
an employer must be extremely clear on the potential risks and gains.

Reducing litigation costs and achieving rapid disposition of disputes are cited as the principal
reasons for employers to engage in ADR. But it must be remembered that some arbitration procedures
have become so elaborate, they have rivaled litigation in expense and delay. Therefore, limitations on
pre-arbitration discovery, scope of hearing and time for rendering award must be considered.

Also, if arbitration were offered across the board to all employees, on any issue that might arise,
an employer would be flooded with arbitration. That could prove more costly than current litigation
burdens. Accordingly, the type of disputes covered, and the employees to whom arbitration will be
extended, must be carefully chosen on the most cost-effective basis.

"The most cost-effective basis" is not, however, just a matter of reducing litigation costs. ADR
can also promote management credibility by providing a means of employee feedback. It becomes a
vehicle for altering policy, inducing managers to act more responsibly and consistently, and enhancing
the employee's sense of participation and influence. Ultimately, this makes employees more productive
and is considered a means to deter organizing activity of unions. Productivity and minimizing legal
liability are two sides of the same coin, and ADR should be undertaken with a clear view of its impact
on productivity.

Accordingly, the first question in designing an ADR system is determining not only whether the
company suffers from an unacceptable burden of litigation or anticipates such a burden, but also
whether productivity is low or could be significantly enhanced. The attached questionnaire is designed
to assist you in making these determinations. Specifically, the questionnaire provokes answers to three
questions: (1) Are there types of disputes that repeatedly arise, and among what groups of employees?
(2) How successful are current employee feedback mechanisms in deterring or settling disputes? and
(3) Does low productivity detrimentally affect company profitability?

You may wish to review the questionnaire at this point. If you already have a working awareness
of problem areas, not only with respect to liability, but productivity as well, simply reading through the
questions may confirm or refine your conclusions. If you've never undertaken a systematic review of
how your corporate culture impacts employment liability and productivity, it would probably be useful
to answer the questions in greater detail.

Naturally, it is impossible in this report to discuss the extensive implications of your company's
litigation, communication and productivity experience. But the answers to the questionnaire point the
way to the ADR approach that might best address your situation. For instance, you may conclude that
litigation is minimal, that communication is sufficient to keep it that way, and that productivity issues
are not hurting the bottom line. That's good. You may not wish to make any changes. Or, you may
wish to use ADR as a back stop for a narrow range of problems if they do arise.

However, if the number of disputes is substantial, if communication has been ineffective in limiting
these disputes, and if productivity issues unacceptably impact profitability, then arbitration or other
forms of ADR may be useful in making improvements. Let's take a look at options.

VII. ADR Options

Arbitration of selected statutory claims is an effective way to limit the most costly and lengthy
litigation. Although there is increasing litigiousness generally, and an expanding employee arsenal of
common law theories and statutory bases, the most damaging are statutory claims such as age, sex,
race, and disability discrimination. Even lower-level employees can initiate these claims because
governmental administrative agencies (federal, state and local) exist to entertain them.

Moreover, the law requires relatively little of an employee to establish the basic elements of a case,
sometimes called a prima facie case, but requires substantial proof by the employer to rebut the basic
complaint. Finally, back pay, and multiples of damages such as compensatory, liquidated and punitive
damages, can throw recoveries wholly out of proportion to the injury alleged, even if proved.

Accordingly, statutory-based discrimination claims would be a first place to start, for all classes of
employees. A next tier of implementation would be those non-statutory disputes that the questionnaire
reveals surface frequently (e.g., a particular policy, discipline, abusive supervision, job restructuring
issues, and so forth that result in termination). Arbitration applied in this focused manner--in costly,
high-risk or frequently occurring cases--can be effective in decreasing litigation costs.

Arbitration of all employment disputes would eliminate most litigation. However, universal
arbitration would also require review of a wide range of work disputes, including those that the
employer would not otherwise be required to defend (e.g., promotion decisions, improper supervisory
treatment, failure to promote, vindictive performance appraisal and so forth). For ADR to be effective,
the balance must be carefully drawn.

Let's look also at what arbitration cannot achieve, no matter how carefully crafted. Arbitration,
although arguably achieving a reduction in litigation costs and a damper on huge judgments, is not
really an "alternative," but rather a substitute for litigation. That is, it is not a means to diffuse problems
before they evolve into full-fledged disputes, it just shifts the forum for their resolution. Other forms of
ADR can be more effective in addressing communication and productivity problems, which are the
breeding grounds of disputes.

The joint employer/employee ("bi-partite") board is closely related to arbitration. Composed
equally of permanent or rotating management and employee representatives (the latter usually elected
by the employees), it is empowered to make final decisions on employment issues. Convening such a
board is a strong statement by management of commitment to employee involvement. It may be time-
intensive, but it will accustom the parties to the practice of working together. This procedure has been
useful where there is a history of cynicism toward management or long term communication problems.
However, such a board is most effective where employees have demonstrated an ability to work well
together, such as in work teams, quality circles or other problem-solving contexts.

A significant feature of both arbitration and the "bi-partite" board is that courts grant preclusive
effect to the decisions reached. This means decisions are final and binding. Yet this is by no means the
overriding criterion in selecting a means of dispute resolution. Procedures that diffuse a dispute before
it mushrooms into a productivity or litigation headache may be more valuable to an employer than a
final and binding resolution once the damage is done.

 For instance, a joint employer/employee board (or even an advisory board composed only of
employees that is not granted final and binding power over disputes), may offer employees a measure
of involvement, or a stake in their employment life, that never existed before. Providing employees with
this limited, but meaningful role in the world of human resource policies (discipline, work content,
production methods, advancement and leave, etc.) that so impact their lives has been shown to increase
productivity. Equally significant, decisions by such boards, even if not binding, serve to deter
subsequent litigation.

A more limited option is the ombudsman or investigator who can help diffuse identifiable trouble
spots in communication and productivity—for instance, departments with personality conflicts,
abrasive supervision, or disaffected workforces. An investigator can probe the real reason for persistent
absences, or elicit accurate collective employee sentiment on departmental procedures. The role is not
to adjudicate, but to persuade, mediate and create ideas for resolution that are acceptable to both sides.
The success of this approach depends on the appointment of an investigator with the talent and prestige
to succeed.

This approach does not require the employer to relinquish power over the result. The downside,
of course, is that while effective in settling disputes, the decision reached is not final and binding, and
employees dissatisfied with the result are free to sue. The investigative process is probably familiar to
you in the context of a sexual harassment charge. Unfortunately, sexual harassment investigations are
too often poorly conducted, thus increasing rather than diminishing the likelihood of litigation.

 A cross between arbitration and investigation is formal mediation. This is most effective when the
employees are skilled and relatively independent. They tend to understand compromise as a way of
doing business and respond to it as a means of resolving disputes and getting on with their work. We
have recommended mediation in a number of sexual harassment cases and job restructuring decisions,
and the procedure has often diffused potentially explosive litigation.

The key to the success of any ADR system is that the employees understand its value. Good
communication, and the productivity advantages that accompany it, cannot be separated from liability.
Any ADR program must be communicated in a way to promote trust in the employer, not increase
distrust. For instance, there are drawbacks to merely inserting the new arbitration procedure in a
handbook. One of the ironies of handbooks is that although provided to demonstrate employer fairness
and promote communication, they often have the opposite effect. They are frequently seen by
employees as rigid, mechanical, and formal; a compendium of management edicts. Grievance
procedures contained in handbooks are viewed cynically by employees and an arbitration procedure
may be viewed the same way.

Accordingly, we believe it is more effective to communicate a new ADR policy in a separate
document disseminated to employees, preferably in special meetings, at which some
explanation/training is provided. For new hires, too, the program should be explained separately, even
if the employment application contains the applicant's acknowledgment that disputes will be submitted
to arbitration.

VIII. Legislative Outlook

There is an almost irresistible momentum for ADR. There is widespread disaffection, among
business and employee groups alike, with the cumbersome, lengthy and costly nature of litigation.
Congress, at every major opportunity, such as the enactment of the Civil Rights Act of 1991 and the
Americans with Disabilities Act, has specifically endorsed ADR. And, as we have seen, courts have
begun the process of stripping away legal impediments to arbitration.

As with all matters subject to the political process, this movement has spawned opposing
legislative initiatives. For example, Senator Feingold (D-Wis.) recently introduced a bill (S 2012) to
prohibit mandatory arbitration as a condition of employment. The proposed legislation would allow
arbitration, mediation or other ADR initiatives only if they resulted from the uncoerced consent of the
employee. While some support for this approach has been generated, we don't believe it is sufficient to
retard the considerable legislative and judicial efforts to expand ADR.
 
IX.Conclusion

In contemplating an ADR system, remember that it can be implemented gradually. The kinds of
issues and the types of employee groups covered may be limited at first, to test the success of the
system. Also, no one system can necessarily achieve all your goals. Combined approaches may be
effective. For instance, an investigator and mediation can be effective in improving communication and
enhancing productivity, while arbitration may more directly influence litigation costs.

We hope that we have provided a foundation for your decision whether to use an Alternative
Dispute Resolution system, and what kind to use. Even if we have triggered more questions than we
have answered, we trust you are further along in this inquiry than you were. Please be assured that we
are available to meet with you, discuss the questionnaire and propose a trial ADR system on a
thoroughly confidential and complimentary basis. We would appreciate a call from you to discuss your
impressions of this report and questionnaire and your views on how ADR can be most practically
implemented at your company.

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