{"id":4744,"date":"2016-04-04T10:47:41","date_gmt":"2016-04-04T15:47:41","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/smallbusiness\/employment-law-and-human-resources\/pre-employment-arbitration-agreements.html"},"modified":"2026-05-01T04:54:00","modified_gmt":"2026-05-01T09:54:00","slug":"pre-employment-arbitration-agreements","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/smallbusiness\/employment-law-and-human-resources\/pre-employment-arbitration-agreements.html","title":{"rendered":"Employment Arbitration Agreements and Your Business"},"content":{"rendered":"\n<div class=\"fl-sectionWithSidebar fl-container fl-flex fl-flex-wrap fl-gap30  wp-container-core-columns-is-layout-9d6595d7 fl-sectionWithSidebar fl-container fl-flex fl-flex-wrap fl-gap30\">\n<div class=\"fl-section-main fl-page-articles fl-section-main fl-section-main-full-width\"><h1 class=\"fl-no-margin-top\">Employment Arbitration Agreements and Your Business<\/h1>\n\n<section class=\"fl-gutenberg-byline\">\n    <div class=\"fl-gutenberg-byline-content\">\n                    By <a href=\"https:\/\/www.findlaw.com\/company\/our-team\/susan-buckner-j-d\/\">Susan Buckner, J.D.<\/a> | Legally reviewed by <a\n                href=\"https:\/\/www.findlaw.com\/company\/our-team\/susan-richmond-esq\/\">Susan Mills Richmond, Esq.<\/a>\n                | Last updated\n        <time>\n                            May 01, 2026\n                    <\/time>\n    <\/div>\n\n            <div class=\"fl-gutenberg-byline-editorial-note fl-text-sm\">\n            <p>Editorial Note: We earn a commission from affiliate partner links on FindLaw. Commissions do not affect the editorial integrity of our legal content.<\/p>\n\n        <\/div>\n    \n    <details class=\"fl-gutenberg-byline-toggle fl-gutenberg-byline-legally-reviewed\">\n        <summary>\n            <i class=\"fl-gutenberg-byline-icon\" aria-hidden=\"true\"><\/i>\n            Legally Reviewed\n        <\/summary>\n\n        <div class=\"fl-gutenberg-byline-toggle-content\">\n            <p><em>This article has been written and reviewed for legal accuracy, clarity, and style by <a href=\"https:\/\/www.findlaw.com\/company\/our-team.html\">FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with <a href=\"https:\/\/www.findlaw.com\/company\/company-history\/editorial-policy.html\">our editorial standards<\/a>.<\/em><\/p>\n\n        <\/div>\n    <\/details>\n\n    <details class=\"fl-gutenberg-byline-toggle fl-gutenberg-byline-fast-checked\">\n        <summary>\n            <i class=\"fl-gutenberg-byline-icon\" aria-hidden=\"true\"><\/i>\n            Fact-Checked\n        <\/summary>\n\n        <div class=\"fl-gutenberg-byline-toggle-content\">\n            <p><em>The last updated date refers to the last time this article was reviewed by FindLaw or one of our <a href=\"https:\/\/www.findlaw.com\/company\/our-team\/contributing-authors.html\">contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please <a href=\"https:\/\/lawyers.findlaw.com\/?fli=bylinelink\" target=\"_blank\" rel=\"noopener\">contact an attorney in your area<\/a>.<\/em><\/p>\n\n        <\/div>\n    <\/details>\n<\/section>\n\n\n    <div class=\"fl-callout-text article-blockquote\">\n        <p>Employee arbitration agreements are legally binding contracts where an employer and employee agree to resolve workplace disputes through a neutral third party instead of court. Matters before arbitration can be wage disputes or contract breaches but claims of sexual harassment may be brought in court.<\/p>\n\n    <\/div>\n\n\n\n<p>Many <span data-term-id=\"27791393\">business owners<\/span> will have <span data-term-id=\"27791354\">employment disputes<\/span> at least once during their business life. Lawsuits can be expensive. The publicity can hurt a company&#8217;s image. Arbitration is less expensive and is conducted outside the <span data-term-id=\"27791360\">court system<\/span>. If handled well, arbitration is beneficial to both\u00a0employers and employees.<\/p>\n<p>This article reviews:<\/p>\n<ul>\n<li>\n<p>The pros and cons of <span data-term-id=\"27791346\">arbitration agreements<\/span><\/p>\n<\/li>\n<li>\n<p>The legality and enforceability of <span data-term-id=\"27791346\">arbitration agreements<\/span><\/p>\n<\/li>\n<li>\n<p>The <span data-term-id=\"27791389\">arbitration process<\/span><\/p>\n<\/li>\n<\/ul>\n<p>See FindLaw&#8217;s <a href=\"https:\/\/www.findlaw.com\/smallbusiness\/employment-law-and-human-resources\/the-hiring-process.html\"><strong>The Hiring Process<\/strong><\/a> for related articles.<\/p>\n<h2><strong>Arbitration in Employment Under the <span data-term-id=\"27791357\">Federal Arbitration Act<\/span> (<span data-term-id=\"27791395\">FAA<\/span>)<\/strong><\/h2>\n<p><a href=\"https:\/\/www.findlaw.com\/adr\/arbitration.html\"><strong>Arbitration takes <span data-term-id=\"27791392\">legal disputes<\/span><\/strong><\/a> out of the courtroom and puts them in a less formal setting. The parties choose a neutral arbitrator who listens to both sides and comes to a decision. Arbitration is usually less expensive than litigation, and the procedure is less formal. Federal and state rules of evidence don&#8217;t apply, so litigants can present any relevant information.<\/p>\n<p>The <span data-term-id=\"27791357\">Federal Arbitration Act<\/span> (<span data-term-id=\"27791395\">FAA<\/span>)\u00a0is a law that enforces <span data-term-id=\"27791346\">arbitration agreements<\/span> between employers and employees. The <span data-term-id=\"27791395\">FAA<\/span> <a href=\"https:\/\/codes.findlaw.com\/us\/title-9-arbitration\/9-usc-sect-2.html\" target=\"_blank\" rel=\"noopener\"><strong>allows employers to include <span data-term-id=\"27791374\">binding <\/span><span data-term-id=\"27791347\">arbitration<\/span><span data-term-id=\"27791347\"> clauses<\/span><\/strong><\/a> in <span data-term-id=\"27791353\">employment contracts<\/span>. <span data-term-id=\"27791367\">Such agreements<\/span> often\u00a0contain language where both parties waive their right to appeal the results of an <span data-term-id=\"27791363\">arbitration proceeding<\/span>.<\/p>\n<p><span data-term-id=\"27791374\">Binding arbitration<\/span> has the same effect as a court ruling. If either party disregards the <span data-term-id=\"27791364\">arbitrator&#8217;s decision<\/span> and goes to court, the judge will honor the <span data-term-id=\"27791364\">arbitrator&#8217;s decision<\/span>.<\/p>\n<p>The <span data-term-id=\"27791397\">U.S. <\/span><span data-term-id=\"27791352\">Supreme Court<\/span> has held that <span data-term-id=\"27791346\">arbitration agreements<\/span> do not violate <span data-term-id=\"27791381\">employee rights<\/span>. Employers may include <a href=\"https:\/\/www.oyez.org\/cases\/2017\/16-285\" target=\"_blank\" rel=\"noopener\"><strong>mandatory employment clauses in <span data-term-id=\"27791353\">employment contracts<\/span><\/strong><\/a> like other mandatory clauses. According to the 2022 <span data-term-id=\"27791397\">U.S. <\/span><span data-term-id=\"27791352\">Supreme <\/span><span data-term-id=\"27791375\">Court<\/span><span data-term-id=\"27791375\"> decision<\/span> in <a href=\"https:\/\/www.supremecourt.gov\/opinions\/21pdf\/21-328_m6ho.pdf\" target=\"_blank\" rel=\"noopener\"><strong>Morgan v. Sundance,<\/strong><\/a> a court must hold a party to its arbitration contract just as the court would to any other kind but not devise novel rules\u00a0to favor arbitration over litigation.<\/p>\n<h2><strong>Exceptions to <span data-term-id=\"27791357\">Federal Arbitration Act<\/span> <\/strong><\/h2>\n<p>The <span data-term-id=\"27791357\">Federal Arbitration Act<\/span> applies to all employers with the following exceptions:<\/p>\n<p><strong>Certain Professions: <\/strong>Under <a href=\"https:\/\/caselaw.findlaw.com\/court\/us-supreme-court\/17-340.html\" target=\"_blank\" rel=\"noopener\"><strong>New Prime Inc. v. Oliveira<\/strong><\/a>, the <span data-term-id=\"27791397\">U.S. <\/span><span data-term-id=\"27791352\">Supreme Court<\/span> made an exception for certain transportation workers, like truck drivers, ship and railroad workers. These employees may be able to go to court instead of arbitration. Therefore, employers should not require employees in these professions to sign an <span data-term-id=\"27791346\">arbitration agreement<\/span>.<\/p>\n<p><strong>State Protections: <\/strong>While <span data-term-id=\"27791385\">independent contractors<\/span> are generally excluded from federal anti-discrimination laws like Title VII, some states, such as <span data-term-id=\"27791350\">California<\/span>, protect workers from harassment and retaliation. Therefore, <span data-term-id=\"27791346\">arbitration agreements<\/span> must comply with state and federal rules.<\/p>\n<h2><strong>Pros and Cons of <span data-term-id=\"27791346\">Arbitration Agreements<\/span><\/strong><\/h2>\n<p>Due to bad press, employers and employees often view arbitration in a negative light. Arbitration is sometimes seen as beneficial to employers at the expense of employees. On the flip side, employers may bear the entire cost of arbitration in some states, making litigation and fee splitting less expensive for the employee.<\/p>\n<p>Dollars and cents are important, but <span data-term-id=\"27791366\">small <\/span><span data-term-id=\"27791393\">business<\/span><span data-term-id=\"27791393\"> owners<\/span> should also consider their business and relationships with employees.<\/p>\n<h3><strong>Pros:<\/strong><\/h3>\n<ul>\n<li>\n<p>Arbitration resolves legal issues faster than litigation. In the vast majority of cases, arbitration will be less expensive.<\/p>\n<\/li>\n<li>\n<p>Both parties have a say in the arbitrator, so the employee feels they have some control over the case.<\/p>\n<\/li>\n<li>\n<p>The <span data-term-id=\"27791389\">arbitration process<\/span> is less formal and gives both parties time to negotiate a settlement before the <span data-term-id=\"27791375\">court&#8217;s decision<\/span>.<\/p>\n<\/li>\n<\/ul>\n<h3><strong>Cons:<\/strong><\/h3>\n<ul>\n<li>\n<p>Both parties waive their right to appeal, so the decision also binds <span data-term-id=\"27791393\">business owners<\/span>.<\/p>\n<\/li>\n<li>\n<p>Since the process occurs outside the <span data-term-id=\"27791360\">court system<\/span>, there is limited discovery.<\/p>\n<\/li>\n<li>\n<p>Courts will review an unfair or unconscionable agreement.<\/p>\n<\/li>\n<\/ul>\n<p>The best way to ensure your <span data-term-id=\"27791347\">arbitration clause<\/span> is lawful is to have it reviewed by an attorney before including it in your <span data-term-id=\"27791368\">employee handbook<\/span>. <span data-term-id=\"27791361\">Federal law<\/span> excludes some items from any <span data-term-id=\"27791346\">arbitration agreement<\/span>.<\/p>\n<h2><strong>Writing Legal <span data-term-id=\"27791347\">Arbitration Clauses<\/span><\/strong><\/h2>\n<p>In 2022, President <span data-term-id=\"27791370\">Biden<\/span> signed the <span data-term-id=\"27791372\">Ending Forced Arbitration of Sexual Assault<\/span> and <span data-term-id=\"27791399\">Sexual Harassment Act<\/span>. The law prohibits enforcement of any <span data-term-id=\"27791353\">employment contract<\/span> that includes a clause requiring employees to arbitrate claims of sexual assault or harassment in the workplace.<\/p>\n<p>Prior case law also prohibits employers from <span data-term-id=\"27791376\">mandatory <\/span><span data-term-id=\"27791346\">arbitration<\/span><span data-term-id=\"27791376\"> agreements<\/span> that prevent workers from filing claims with the EEOC or the National Labor Relations Board. These clauses can prohibit workers from joining <span data-term-id=\"27791358\">class-action lawsuits<\/span> that involve the employer.<\/p>\n<p>Your <span data-term-id=\"27791346\">arbitration agreement<\/span> may be invalid if the arbitrator did not come from a neutral organization. Your agreement should name the <span data-term-id=\"27791400\">American Arbitration Association<\/span>, JAMS, or other recognized neutrals.<\/p>\n<p>The agreement should not allow the employer the option to sue the employee unless the employee can also sue the employer. Some <span data-term-id=\"27791365\">state laws<\/span> invalidate <span data-term-id=\"27791347\">arbitration clauses<\/span> on those grounds.<\/p>\n<p>An <span data-term-id=\"27791346\">arbitration agreement<\/span> should require the parties to agree on an arbitrator. The agreement designates a specific third party if they cannot agree on one. An example is the Chartered Institute of Arbitrators.<\/p>\n<h2><strong><span data-term-id=\"27791371\">Pre-Dispute <\/span><span data-term-id=\"27791346\">Arbitration Agreements<\/span><\/strong><\/h2>\n<p>How you tell your employees about the <span data-term-id=\"27791346\">arbitration agreement<\/span> is as important as how you write the <span data-term-id=\"27791346\">arbitration agreement<\/span>. Courts will rule an agreement unconscionable if it is too complicated or unfair to the employee. Most industry experts suggest that you have a separate <span data-term-id=\"27791346\">arbitration agreement<\/span>. <span data-term-id=\"27791355\">Human resources<\/span> should review the agreement with each employee.<\/p>\n<p>When you present your agreement to workers, give them these facts:<\/p>\n<ul>\n<li>\n<p>A <span data-term-id=\"27791376\">mandatory <\/span><span data-term-id=\"27791346\">arbitration<\/span><span data-term-id=\"27791376\"> agreement<\/span> does not interfere with their NLRA rights. <span data-term-id=\"27791346\">Arbitration agreements<\/span> cannot supersede a <span data-term-id=\"27791396\">collective bargaining agreement<\/span>.<\/p>\n<\/li>\n<li>\n<p>The <span data-term-id=\"27791346\">arbitration agreement<\/span> does not interfere with their right to file a complaint with the EEOC. You cannot require them to arbitrate over their <span data-term-id=\"27791356\">civil rights<\/span>.<\/p>\n<\/li>\n<li>\n<p>Employers cannot require employees to waive their right to sue for <span data-term-id=\"27791362\">sexual harassment claims<\/span>.<\/p>\n<\/li>\n<li>\n<p>You cannot arbitrate workers&#8217; compensation claims brought by the government. If the government sues you on behalf of an employee, you cannot ask it to arbitrate.<\/p>\n<\/li>\n<\/ul>\n<h2><strong>The <span data-term-id=\"27791389\">Arbitration Process<\/span><\/strong><\/h2>\n<p><span data-term-id=\"27791374\">Binding arbitration<\/span> is one form of <span data-term-id=\"27791373\">alternative dispute resolution<\/span> (ADR). The process takes place outside of the state or <span data-term-id=\"27791390\">federal <\/span><span data-term-id=\"27791360\">court<\/span><span data-term-id=\"27791360\"> systems<\/span>. One party must file a request for arbitration with the <span data-term-id=\"27791400\">American Arbitration Association<\/span> or a similar ADR organization.<\/p>\n<p>The ADR agency will notify the respondent, who must file an answer or counterclaim. The organization provides both parties with a list of available neutral arbitrators. The arbitrators may be administrative law judges or attorneys.<\/p>\n<p>The <a href=\"https:\/\/www.findlaw.com\/adr\/arbitration\/arbitration-rules-and-procedures.html\" target=\"_blank\" rel=\"noopener\"><strong><span data-term-id=\"27791363\">arbitration proceedings<\/span><\/strong><\/a> begin with a preliminary hearing. At this meeting, each party discusses the substantive issues of the case with the arbitrator. The parties may also exchange information and witness lists. Each party exchanges discovery and agrees to evidence and arguments for the hearings. Finally, each party presents testimony in a hearing or a series of hearings, and the arbitrator makes a decision.<\/p>\n<h2><strong>Getting Legal Help<\/strong><\/h2>\n<p><span data-term-id=\"27791351\">Employment arbitration<\/span> can be effective for employers and employees. Employers must be cautious so the clause does not violate <span data-term-id=\"27791391\">employment rights<\/span>. Contact an <a href=\"https:\/\/lawyers.findlaw.com\/employment-law-employer\/?fli=dcta\" target=\"_blank\" rel=\"noopener\"><strong><span data-term-id=\"27791348\">employment law<\/span> attorney<\/strong><\/a> for assistance if you need help drafting an <span data-term-id=\"27791346\">arbitration agreement<\/span>.<\/p>\n\n\n<div class=\"was-this-helpful\">\n    <div\n            class=\"was-this-helpful__question-container\"\n            aria-labelledby=\"was-this-helpful__question\"\n            role=\"group\"\n    >\n        <span\n                id=\"was-this-helpful__question\"\n                class=\"was-this-helpful__question fl-text-lg-bold\"\n        >Was this helpful?<\/span>\n        <button\n                class=\"was-this-helpful__button fl-text-sm\"\n                aria-label=\"Yes\"\n                value=\"yes\"\n        >\n            <span class=\"was-this-helpful__button-text fl-text-bold\">Yes<\/span>\n            <i class=\"was-this-helpful__button-icon\">\n   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