The Professional Employer Organization as Dispute System Designer: Mandatory Arbitration in the Co-Employment Context

A professional employer organization (“PEO”) provides payroll, employment tax, and human resources services to its small to mid-sized business clients. Today, more than 200,000 businesses employing 4.5 million people utilize a PEO’s services. A common PEO strategy is to require co-employees of the PEO and its client companies to agree to mandatory arbitration provisions despite criticism that mandatory employment arbitration lacks public accountability, has lower win rates for employees, and may fail to protect due process. Mandatory arbitration is one method of dispute system design, a term that describes the selection and development of processes by which a company chooses to handle disputes. This Article provides insight into the usage of mandatory employment arbitration by PEOs and their client companies. It assesses the role of the PEO as a dispute system designer and employs the dispute system design literature to offer an improved way forward to benefit the co-employees of PEOs and their client companies.