Employment Arbitration Agreements and Your Business

Many business owners will have employment disputes at least once during their business life. Lawsuits can be expensive. The publicity can hurt a company's image. Arbitration is less expensive and is conducted outside the court system. If handled well, arbitration is beneficial to both employers and employees.

This article reviews:

• The pros and cons of arbitration agreements
• The legality and enforceability of arbitration agreements
• The arbitration process

See FindLaw's The Hiring Process for related articles.

Arbitration in Employment

Arbitration takes legal disputes 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't apply, so litigants can present any relevant information.

The Federal Arbitration Act (FAA) allows employers to include binding arbitration clauses in employment contracts. Such agreements often contain language where both parties waive their right to appeal the results of an arbitration proceeding.

Binding arbitration has the same effect as a court ruling. If either party disregards the arbitrator's decision and goes to court, the judge will honor the arbitrator's decision.

The U.S. Supreme Court has held that arbitration agreements do not violate employee rights. Employers may include mandatory employment clauses in employment contracts like other mandatory clauses. According to the 2022 U.S. Supreme Court decision in Morgan v. Sundance, a court must hold a party to its arbitration contract just as the court would to any other kind but not devise novel rules to favor arbitration over litigation.

Pros and Cons of Arbitration Agreements

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.

Dollars and cents are important, but small business owners should also consider their business and relationships with employees.

Pros:

• Arbitration resolves legal issues faster than litigation. In the vast majority of cases, arbitration will be less expensive.
• Both parties have a say in the arbitrator, so the employee feels they have some control over the case.
• The arbitration process is less formal and gives both parties time to negotiate a settlement before the court's decision.

Cons:

• Both parties waive their right to appeal, so the decision also binds business owners.
• Since the process occurs outside the court system, there is no required discovery.
• Courts will review an unfair or unconscionable agreement.

The best way to ensure your arbitration clause is lawful is to have it reviewed by an attorney before including it in your employee handbook. Federal law excludes some items from any arbitration agreement.

Writing a Legal Arbitration Clause

In 2022, President Biden signed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act. The law prohibits enforcement of any employment contract that includes a clause requiring employees to arbitrate claims of sexual assault or harassment in the workplace.

Prior case law also prohibits employers from mandatory arbitration agreements that prevent workers from filing claims with the EEOC or the National Labor Relations Board. These clauses can prohibit workers from joining class-action lawsuits that involve the employer.

Your arbitration agreement may be invalid if the arbitrator did not come from a neutral organization. Your agreement should name the American Arbitration Association, JAMS, or other recognized neutrals.

The agreement should not allow the employer the option to sue the employee unless the employee can also sue the employer. Some state laws invalidate arbitration clauses on those grounds.

An arbitration agreement should require the parties to agree on an arbitrator. The agreement designates a specific third party they cannot agree on one. An example is the Chartered Institute of Arbitrators.

Pre-Dispute Arbitration Agreements

How you tell your employees about the arbitration agreement is as important as how you write the arbitration agreement. 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 arbitration agreement. Human resources should review the agreement with each employee.

When you present your agreement to workers, give them these facts:

• A mandatory arbitration agreement does not interfere with their NRLA rights. Arbitration agreements cannot supersede a collective bargaining agreement.
• The arbitration agreement does not interfere with their right to file a complaint with the EEOC. You cannot require them to arbitrate over their civil rights.
• Employers cannot require employees to waive their right to sue for sexual harassment claims.
• You cannot arbitrate workers' compensation claims brought by the government. If the government sues you on behalf of an employee, you cannot ask it to arbitrate.

The Arbitration Process

Binding arbitration is one form of alternative dispute resolution (ADR). The process takes place outside of the state or federal court systems. One party must file a request for arbitration with the American Arbitration Association or a similar ADR organization.

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.

The arbitration proceedings 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.

Getting Legal Help

Employment arbitration can be effective for employers and employees. Employers must be cautious so the clause does not violate employment rights. Contact an employment law attorney for assistance if you need help drafting an arbitration agreement.