The cost of the defense was so shocking that the international engineering firm decided there had to be a better way to resolve employment disputes. "With 30,000 employees in the United States alone, we know conflict is inevitable," explains William Bedman, Brown & Root's assistant general counsel for HR. "What we needed was a fundamentally different way of managing that conflict."
In an effort to avoid future litigation, the company devised an alternative dispute resolution (ADR) process in which employees attempt to resolve conflicts through a series of internal grievance procedures. If these procedures fail, which they rarely do, the last step in this process is mandatory binding arbitration. The process has been so successful in resolving disputes that Brown & Root's legal fees have dropped 90 percent since the program began four years ago. Furthermore, of the 2,000 disputes brought by employees since that time, only 30 have reached the arbitration stage.
As one of the first companies to successfully utilize mandatory arbitration, Brown & Root's program has been copied by several other large employers that are struggling to contain escalating legal fees. By mandating that employees resolve employment conflicts through a series of grievance steps culminating in binding arbitration, companies are hoping to avoid runaway jury verdicts, expensive discovery costs and lengthy, public lawsuits.
What these companies are finding, as an added benefit, is that alternative dispute resolution agreements also are an excellent way to protect employee rights and maintain good employee relations. As Martin Payson, management lawyer with Jackson, Lewis, Schnitzler & Krupman, in White Plains, New York, explains: "In the long run, alternative dispute resolution will be the single most significant program for ensuring employment rights and minimizing the risks of litigation."
Why are companies choosing alternative dispute resolution?
Many HR professionals believe the use of alternative dispute resolution is long overdue. Consider these statistics:
- There has been a 2,200 percent increase in the number of discrimination lawsuits filed in the past two decades, according to the U.S. Department of Labor.
- Employment litigation overall has increased by 400 percent in the past 20 years, according to New York City-based law firm Orrick, Herrington & Sutcliffe.
- Winning even a simple case can cost companies up to $100,000 in legal fees, and as Brown & Root discovered, a complex case can be two to three times that amount. Worse yet, when juries find in favor of plaintiffs, damage awards can soar into the multimillion dollar range.
- The median time between the date a lawsuit is filed and commencement of a civil trial is 2.5 years. Appeals can stretch the process even longer.
Given the growth in employment lawsuits and the enormous time and cost involved in trying them, it's no wonder employers are starting to seek an alternative to conventional court trials. Although provisions for ADR have long been part of union contracts, it wasn't until very recently that companies actually felt comfortable mandating alternative dispute resolution for their unrepresented employees. In fact, the use of mandatory arbitration agreements outside the collective bargaining arena represents a major shift in philosophy on the part of many employers.
How? According to Payson, for the last several years, companies have shied away from using any sort of employment agreement out of fear that the courts would interpret the existence of such a contract or agreement as a promise of employment. In the event of a termination, they worried employees could point to the contract as proof of guaranteed employment and successfully seek reinstatement.
This all began to change in 1991 thanks to a U.S. Supreme Court case in which the court upheld the use of a signed contract of employment in which the employee agreed to follow mandatory arbitration procedures. What this did, Payson explains, is open the door for companies to establish specific agreements for certain conditions of employment, including the use of alternative dispute resolution.
In February of this year, the Supreme Court decision was bolstered by a U.S. Court of Appeals case in which the court ruled that an employee may indeed be compelled to arbitrate workplace disputes with his or her employer, including individual statutory claims arising under Title VII of the 1964 Civil Rights Act and other federal laws. Simply stated, it appears that the courts are starting to view mandatory employment arbitration agreements as legitimate. As the court put forth in its written decision: "For all its shortcomings, arbitration is not necessarily inferior to litigation as a mechanism for the resolution of employment disputes."
Still, although the courts appear to be giving a green light to mandatory employment arbitration, the fact remains that the use of ADR in the workplace remains relatively new and untested. In fact, some employee advocates view the ADR plans as controversial and not at all in the employee's best interest. Among other concerns, they fear that ADR takes away some of the rights employees would be entitled to under a jury trial. Companies that have experience with alternative dispute resolution, however, believe the plans can and should be structured to benefit both the employee and the company-and that doing so will make the plans themselves stand up in court. In fact, Rockwell International, based in Seal Beach, California, structured its plan as an employee benefit. "The cost of litigation wasn't the driver behind our 'Employee Issue Resolution Process,'" explains Nanette Clements, director of succession planning and HR. "We wanted to offer our employees a way to resolve conflicts in a fair, consistent, simple and quick manner."
ADR includes a variety of ways to resolve disputes.
So how should alternative dispute resolution programs be structured? What are the necessary components of an effective plan? And how can human resources professionals create plans that maintain and enhance employee rights?
Since the intent of ADR is to resolve disputes in a timely, cost-effective manner, companies that have implemented these programs don't merely substitute arbitration, during which a neutral third party hears the case and renders a decision, for litigation, which involves trying the case in a courtroom. As important as arbitration is to the process, ADR typically includes a variety of ways to resolve disputes, starting with an open-door policy. Arbitration, so to speak, is typically the court of last resort.
Open-door policy: As Step 1 in a typical ADR process, the open-door policy is designed to foster risk-free, open communication between an employee and either his or her manager or another representative of management. "Under the terms of our open-door policy, the manager must try to work out the employee's conflict," says Brown & Root's Bedman. To make employees feel more comfortable coming forward with a problem, Brown & Root's policy also prohibits retaliation by management. "We've gotten rid of managers who didn't pay attention to that," Bedman says.
To increase the likelihood of a problem being resolved at this stage, Brown & Root developed a training program to teach supervisors how to handle workplace conflict. To date, 5,000 management employees have attended the program. Because open-door meetings aren't tracked, Bedman is unable to say how many conflicts are solved at this open-door stage, but he believes countless little conflicts are prevented from becoming bigger disputes thanks to more open communication.
Peer-review panel/Ombudsperson: If the employee's conflict isn't solved through open-door meetings, the next stage in a typical ADR program is either a conference with a peer-review panel or an ombudsperson-or in some cases, both.
Orlando, Florida-based Darden Restaurants, which owns the Olive Garden and Red Lobster restaurant chains, has a formal peer-review process in which employees present their issues to a three-person peer-review panel. (For nonmanagement employees, the panel consists of two employees from the same salary grade, as well as one management employee. For management personnel, the panel consists of three other managers.) The panel, upon hearing the employee's complaint, suggests resolutions to both the employee and the company.
Say the dispute is over scheduling. The panel might recommend that a restaurant manager change the schedule to meet the employee's demands. Although either side can reject the panel's decision, usually the advice is followed. According to Cliff Whitehill-Yarza, senior vice president and general counsel, approximately 90 percent of all disputes that get to peer review are settled at this stage.
The ombudsperson process, in which an objective representative from HR hears the employee's complaint, is similar to peer review in that the ombudsperson makes recommendations to both the company and the employee. Rockwell International uses an ombudsperson process, and the company estimates 70 percent to 80 percent of all conflicts are solved this way.
Mediation: Employees who can't get satisfactory resolution through a peer-review plan or ombudsperson then have the option of pursuing mediation. Mediation is a confidential, nonbinding process which uses a neutral third party to guide the employee and the company toward a mutually beneficial resolution. The mediator doesn't impose his or her will or judgment on the parties, but helps them decide for themselves whether to settle and on what terms.
Brown & Root staffs two full-time internal mediators and also has trained 150 employee volunteers to serve as internal mediators should the need arise. In parts of the country where employee mediators aren't available, the company hires mediators from national mediation and arbitration firms such as American Arbitration Association based in New York City, or JAMS/End Dispute, based in Irvine, California.
"Employees can bring any issue to mediation," Bedman explains, including conflicts with co-workers, pay problems and alleged discrimination on the basis of race, sex or age. The only issues excluded from mediation are unemployment and workers' compensation claims.
Over the last four years, 250 employees have pursued mediation at Brown & Root, and all of the issues have been solved at this stage. Resolutions have ranged from a simple apology on the part of management to payment of the equivalent of five years' salary.
Arbitration: As mentioned earlier, the final step in a typical ADR process is usually arbitration, in which an experienced arbitrator hears both sides of the case and then resolves it by rendering a specific decision or award. Employment arbitrators usually are experienced employment attorneys or retired judges. In "binding" arbitration, the decision or award made by the arbitrator is final.
Companies that encourage arbitration usually set it up as the last stage in the ADR process, although employees may be allowed to skip the first few steps and jump right to arbitration if they so desire. Because employees usually pursue the other internal grievance steps first, very few cases ever make it to arbitration. In fact, a survey published in the January 1997 issue of Dispute Resolution Journal, a publication of the American Arbitration Association, reveals that the vast majority of companies with mandatory arbitration programs have not yet arbitrated a single dispute.
Successful arbitration programs include key elements.
For employment arbitration programs to be successful-and hold up in court, if challenged -- Payson suggests companies structure the arbitration process so that employees are accorded the same rights they would have in a court of law. "Arbitration shouldn't be used as a device to rob employees of substantive rights," he says. Furthermore, the same damage awards must be available from an arbitrator as would be from a judge and jury.
Payson also suggests that companies structure the arbitration procedure to be fair in every respect. How do you determine what's fair? In 1995, the American Bar Association's committee on ADR and Labor and Employment Law developed a suggested "Due Process Protocol" to ensure fairness and equity in the resolution of workplace disputes. The protocol sets forth the process companies should follow in resolving employment disputes
Another way to ensure employee rights are maintained in the arbitration process is to allow employees to hire their own legal counsel. Some companies have gone so far as to provide financial assistance to employees wishing to hire lawyers. For example, New York City-based Philip Morris Companies Inc., provides employees financial assistance up to $3,500 per dispute through its "Dispute Resolution Benefits Plan." According to Eric Taussig, vice president and associate general counsel, the program is offered like typical insurance coverage: the employee pays 20 percent of legal costs and the company pays 80 percent up to $3,500.
Why does Philip Morris give employees money with which they might file claims against the company? "We were concerned that employees might perceive the ADR process as a take-away, which it isn't," Taussig says. "By giving them the means to hire their own counsel, we ensure that employees are treated fairly and equitably."
Employment contracts enforce alternative dispute resolution policies.
How do companies make sure that employees use ADR and arbitration instead of filing lawsuits against the company? This gets back to the issue of employment agreements. According to the survey published in Dispute Resolution Journal, about 75 percent of employers using alternative dispute resolution plans require new employees to participate in the plan as a condition of employment, half require existing employees to participate, and the rest encourage but don't require their current employees to do so.
The requirement for existing employees is enforced in different ways. Philip Morris' alternative dispute resolution plan, which is designed for use with sales employees only, has been established as a condition of continued employment. Existing employees are given a copy of program guidelines and they must sign and acknowledge its receipt. Rockwell requires high-salary employees, new hires and employees who change payrolls (for example, moving from one unit to another, or from nonexempt to exempt) to sign an agreement to pursue binding arbitration in the event of a dispute. The program eventually will be rolled out for the entire workforce.
And while Brown & Root doesn't require employees to sign its program guidelines, the guidelines firmly state that the dispute resolution plan is an "exclusive procedural mechanism for the final resolution of all disputes." What happens if an employee tries to circumvent the process and file a lawsuit? "We file a motion with the court to send the case to binding arbitration," Bedman says.
Companies that have required employees to sign contracts agreeing to binding arbitration report few, if any, objections from employees. This is because the plans themselves have been promoted as a way to resolve employment conflicts quickly and save both the employer and employee money.
"Neither the employer nor the employee are well served by litigation," says Whitehill-Yarza. Not only do trials cost a lot of money, but it can be years before a dispute is resolved. "In the restaurant business employees move around a great deal," he adds. "Our dispute-resolution process was developed -and marketed-as a way to resolve disputes quickly so that employees can get on with their lives."
Furthermore, adds Taussig: "Plaintiffs may even get more favorable treatment in arbitration because, unlike in traditional litigation, there's no way for a judge to use summary judgment to throw out the case ahead of time."
In the end, even though companies typically pursue mandatory arbitration agreements as a way to save money, what they're finding is that there are actually some great employee-relations benefits to the process. Even Brown & Root, whose ADR program was developed as a way to stanch the outward flow of legal fees, has found it to be a great tool for increasing workplace communication.
"Communication is at the heart of almost all employment problems," Bedman says, "and ADR provides several opportunities for the parties involved to communicate. It's amazing what happens when employees are given the chance to sit down and talk about their issues and feel that the company is committed to resolving them. Arbitration is not a cure-all, but it does legitimize the questioning of authority. And that can't help but make employees feel better about speaking up before a problem reaches the critical stage."
Workforce, May 1997, Vol. 76, No. 5, pp. 50-57.