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The Benefits of Arbitration Agreements

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Paul Krauss says his first wrongful termination claim was like a punch to the gut.

“The first time we were challenged, we still had that mentality that we were trying to do everything we could to take care of our employees,” he says. “So we were like, ‘Whoa! What is this?’”

As the owner of Craftsman Auto Body, a multi-shop operation in Virginia, Krauss says that he never gave employee-related lawsuits much thought when his business had only a single location.

“When I was in one store with my brother and we had 25 employees, most of whom had worked with us for more than 15 years, none of that kind of stuff mattered to me,” he says.

But as his business started to grow to 12 facilities and more than 200 employees, Krauss says he realized he needed to protect himself from costly and time-consuming litigation and court processes.

That’s why having an employee arbitration process in place is key, says Cory King, attorney with San Marcos, Calif.–based employment law firm Fine, Boggs & Perkins, which works with several collision repair shops.

Krauss says his lawyer also advised him to implement an employee arbitration agreement process and it’s a step he doesn’t regret. Krauss says the employee arbitration agreement was important in getting that wrongful termination claim settled quickly.

Both Krauss and King agree that it’s not just MSOs that could benefit from the practice. Even if your shop is small, there’s no telling when a wrongful termination lawsuit could end up in your lap.

“It’s an efficient way to do it and more logical,” he says. “I would probably always argue for arbitration because I think it’s the quicker way. Whereas if you let it go all the way to the Equal Employment Opportunity Commission, it can take forever.”

Krauss and King offer five reasons why shop owners, regardless of company size, throughout the country should work with their attorney to get one in place.

The Agreement

Through employee arbitration agreements, employees give up their right to sue your shop in court over job-related issues, such as wrongful termination, breach of contract or discrimination. The agreement takes employee-related lawsuits out of the court system and puts them into private binding arbitration with a judge instead.

A properly written arbitration agreement—which has been upheld by the U.S. Supreme Court—still uses similar processes compared to courts, such as rules of procedure and rules of evidence, but there is no jury trial. The agreement states that a retired court-level judge will hear the case—a judge who has experience putting law and facts together to come up with “real reason decisions.” Nothing else changes in regard to the legal process.

King says there are five main reasons why employee arbitration agreements are good for collision repair businesses:

#1: More Favorable Decisions

Krauss says arbitration can often lead to more favorable results for businesses. Through arbitration, the business owner is able to have a trial court–level judge listen to facts and apply current laws to establish a “real reason decision.” King says this tends to be a lot better compared to having your case heard by a 12-person jury.

“Juries are typically comprised of peers of the plaintiff in employment cases (the employee), rather than peers of the company, so juries are more apt to be sympathetic toward employees and side in their favor,” he says.

#2: Save Litigation Costs

In most U.S. states, companies are required to pay for the cost of the arbitration process. Arbitration fees can reach a lump sum of $35,000, which can sometimes scare some shop operators away.

But you don’t have to pay the entire arbitrator fee unless the case actually goes through the entire arbitration process of hearings and depositions. King says that doesn’t happen in most cases; 99 percent of arbitration cases go away through settlements or summary judgments before that fee must be paid.

For example, King says he recently won an arbitration case that was dismissed after a summary judgment before it actually went to arbitration, which would have cost about $35,000. The case only required three phone hearings with the arbitrator, a cost of $9,000 to the client. That client would have paid at least $9,000 just for two appearances in court, and King says it’s likely that the case would still not be resolved.

You also have to look at the bigger picture of the judicial process.

“If you understand how the court system works, you’ll realize what a deal that actually is in the grand scheme of a lawsuit,” King says. “Even when shops have to cover arbitration costs, the effort is generally less expensive compared to the court process in the long run.”

The bottom line is: You’re ultimately going to pay a lot less opting for the arbitration process compared to going to court.

#3: Save Attorney Fees

Most of the arbitration process is conducted over the phone. All meetings between your attorney and arbitrator leading up to the actual arbitration are conducted through conference calls. In most cases, attorneys never even have to see arbitrators face-to-face because the case usually goes away before the arbitration hearings begin. That saves an immense amount of money.

If you go through the court system, on the other hand, each of those meetings is conducted in-person at the courthouse, which dramatically raises your attorney fees.

For example, attorneys have status report conference calls with arbitrators to provide reports on the case and receive instructions on what needs to happen next. That requires about 15 minutes of preparation, two minutes on the call, and 10 minutes afterward making notes for the client. The shop client is only billed for roughly 30 minutes of time for the attorney to appear at that meeting.

Since courts require those meetings to take place at the courthouse, clients are billed for attorney travel time as well as time spent at the courthouse. King says most courts are extremely backlogged, so a two-minute status report meeting in front of a judge can take up to three hours waiting to be seen. In those situations, shop clients could be billed for seven hours of attorney fees for a process that really only takes 30 minutes.

#4: Stay in Control

Arbitration agreements put you in control of the litigation process, a luxury you don’t have with courts. Courts have mandatory, strict deadlines that generally can’t change in order to move cases through as quickly as possible. In addition, judges have requirements to move things through their court at a certain speed. They push you to set trial dates and move forward on their schedule.

But that’s not always in the best interests of the case because it can unnecessarily increase costs for everyone involved, King says.

“Sometimes you don’t want to take a case through the entire trial process,” he says. “Sometimes you want to slow down to assess possible settlement solutions first.”

Arbitrators usually allow both parties to take extra time to settle the case before spending money on the arbitration process. That allows both sides to assess the case and make wiser decisions before scheduling depositions.

#5: Prevent Class Action Lawsuits

King says the biggest reason why all shops should have binding arbitration agreements in place is due to all of the class action litigation happening right now for employees against their employers.

“Your shop can deal with defending or settling a few single claims, but class action claims will kill a small business,” he says. “They can result in a very expensive decision against your company.”

For example, AutoNation recently got served for an alleged wage and hour violation. The lawsuit, which was filed by one employee on behalf of every employee at each of the company’s locations, is asking for attorney fees of $5 million and four years of minimum wage for each employee. According to King, it’s easily going to be a $50–$60 million claim.

A similar class action lawsuit filed against a 10-employee body shop could generate total liability of roughly $50,000, not including attorney fees.

An arbitration agreement is one of the best things shop operators can do as a first line of defense to protect themselves from class action lawsuits.

A properly written arbitration agreement should not agree to arbitrate class action claims, only individual claims. That way, if an employee files a class action lawsuit against your shop, you compel that case into arbitration as an individual single claim. That one individual cannot represent a class, and the only way an attorney could come after you on behalf of every employee would be to file an entirely separate lawsuit for each individual. They’re not going to do that; it’s highly unlikely that all of your employees would opt to file their own claim.

Even though he has used it sparingly, Krauss says an arbitration agreement has become a standard piece of human resource documentation—and has been even since his shop was significantly smaller.

“In today’s world, which I think is getting more litigious, you’ve got to write things down,” he says. “You have to have more formal agreements, even if you don’t want to.”

King and Krauss suggest shop operators consult with their attorney about the creation of the agreement to ensure the document is written properly and includes all of the necessary information. 

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