Lawsuits are expensive and inconvenient, but employee litigation can be even more painful for companies, executives, and managers. Employee lawsuits hamper morale and could encourage other employees to follow with their own lawsuits. This kind of litigation can also expose information that companies would rather keep quiet. Additionally, such litigation can generate nasty PR.

Fortunately, employers can minimize many employee lawsuits and their fallout through arbitration agreements, where a neutral arbitrator hears the facts of the dispute and makes a binding ruling. A study by Alexander Colvin of Cornell University found that employers win more often in arbitration than in litigation, employee awards are less, and the proceedings move much faster.

But not all arbitration agreements are created equal. In fact, courts frequently throw out agreements that judges decide are flawed or too heavily biased in favor of employers. Employers need to understand the limits of arbitration agreements, in order to implement effective ones that will provide all the benefits they are looking for.

The ABCs of Arbitration Agreements

Arbitration is a form of alternative dispute resolution, where two sides look outside the court system to resolve a conflict. In arbitration, an impartial arbitrator listens to claims, facts, and testimony from both sides, then issues a decision.

By signing arbitration agreements, employees typically waive their right to file lawsuits when they have a dispute with their employers. However, the obligation to arbitrate can vary. Some employers require all disputes to go to arbitration, while others designate arbitration for only certain issues. “Binding” arbitration is most frequently used in employment agreements, where both sides agree ahead of time that the arbitrator’s decision will be final, with very limited basis to appeal.

However, an arbitration agreement alone does not mean that employers can never be sued over an employment issue. State and federal regulators can still sue employers when employees file complaints against companies for violating discrimination, pay, or other laws.

Once employees or former employees decide to enter into arbitration, there are three basic steps in the proceedings—prehearing briefs, the hearing, and the arbitrator’s decision.

The prehearing briefs allow the company and employees to present their views and describe their evidence to the arbitrator. During the hearing, each side presents their cases to the arbitrator, which can include calling witnesses. Then the arbitrator makes a decision.

Pros and Cons

While arbitration agreements offer many advantages, they can include some significant downsides. Among the pluses:

• Cheaper and faster. Litigation can drag on for years, and cost vast sums of money. Arbitration is generally much less expensive. In some cases, neither side even needs to hire an attorney. Arbitration also usually proceeds much faster than lawsuits.

• Greater confidentiality.Court records are usually public, and controversial or high-profile court cases can garner a lot of publicity—much of it negative for employers. Unlike jury trials, arbitration hearings are not public and typically provide a much greater level of privacy for both sides.

• Informality. Appearing in court can be intimidating for employers and employees alike, and the rules can seem archaic and illogical to non-lawyers. Arbitration hearings tend to be less formal than courtroom appearances. Hearings may take place in a conference room, rather than a courthouse, and arbitrators are often more flexible about working around participants’ schedules.

• More predictable process. Juries are notoriously unpredictable and prone to emotional decisions. In arbitration, that unpredictability is minimized, replaced by a trained professional who should easily grasp the issues involved. Some employees may hope to hit the jackpot with a sympathetic jury and may consider the lack of a trial to be a downside. But the fact is, neither side can predict the outcome in a jury trial.

Along with the advantages, though, arbitration can have negative consequences that employers should understand. The downsides to arbitration include:

• Employees may resent the agreements.While arbitration may be made a mandatory condition of employment, most people balk at signing employment arbitration agreements, according to a survey by Lake Research Partners. The majority of people, 59 percent, oppose “forced arbitration clauses in the fine print of employment and consumer contracts,” the study reported.

• Confusion over arbitration.The survey also found that many people were unclear on the provisions of arbitration agreements. Nearly three-quarters of respondents thought they kept the right to sue their employer if they were seriously injured or had a major work dispute, even if they signed a binding arbitration agreement. Less than a third remembered reading about arbitration in their employment contracts. Employees who can claim they did not understand an arbitration agreement may try to contest its validity in court.

• Less discovery.Arbitration also typically allows less discovery, or information that each side can get from the other. While discovery is lengthy and often adds a huge amount to the cost of the typical lawsuit, the lack of this kind of information can hurt both sides in an arbitration proceeding.

• Inability to appeal.In the judicial system, litigants can appeal when they feel a court ruling is unfair. Arbitrators don’t operate within this type of framework, and most arbitration rulings cannot be appealed. So if either side is unhappy with the arbitrator’s ruling, there is little recourse.

What Employers Should Do Now

Employers can find many advantages to requiring employees to sign arbitration agreements. But a badly written one can be worse than not having one at all. Here’s what employers need to know about creating arbitration agreements that are fair to employees and will stand up to any challenges.

• Look at your current policies.If you have arbitration policies in place now, take some time to review them. If you don’t have any in place, now is a good time to consider one. Be sure to involve a wide group in the process, including HR, in-house, and outside counsel.

• Consider court rulings and laws. For a process that was designed to avoid the judicial system, arbitrations agreements frequently end up in court. Federal laws, such as the Federal Arbitration Act, and state laws also impact the scope of employment arbitration agreements. So companies need to understand exactly what court rulings and laws impact them and the specific types of agreements they can lawfully institute.

• Be specific and upfront. Vague arbitration clauses may not stand up in court, so it’s important that employers be as specific as possible about the terms and processes involved with arbitration. When designing or updating arbitration agreements, talk to in-house and outside counsel to be sure that the agreements will not end up being contested as vague, unfair, or otherwise disputed.

Employers should also draw attention to the agreements and not bury them deep inside the employee handbook. That way, employees and former employees won’t be able to claim that they didn’t understand the clauses or didn’t know what they contained.

• Consider scope. Employers should carefully consider what issues will be decided by arbitration. Some write very broad arbitration agreements that require all disputes to be arbitrated. Others limit arbitration to termination or other serious matters. Consider your industry, the best practices of others and what types of disputes your specific company frequently faces when determining the scope of the agreement. If you do implement mandatory arbitration, be sure to include a class action waiver provision which will require all claims to be made on an individual basis.

• Be fair.Courts are more likely to strike down arbitration clauses that blatantly favor employers. For example, be sure to provide employees with a say in choosing the arbitrator and not make it the employer’s choice alone. Employers should also not set the bar for filing arbitration too high, such as requiring employees to pay filing fees.

• Explain the advantages.While many employees may balk at the idea of signing an arbitration agreement, a well-written agreement should also work in their favor. Take the time to explain the advantages, so employees understand how signing the agreement will benefit them as well.

 Companies shouldn’t view arbitration as a way to limit the rights of employees to bring up issues or to be compensated if something goes wrong. Instead, employers should think about the process as a way to settle disputes that doesn’t involve the courts. With the right attitude and agreements in place, both sides can benefit from the process, rather than dragging matters through a judicial system that may take years to finally resolve a dispute.