What Is an Arbitration Agreement & Should My Company Have One?

The arbitration process can be faster and less expensive for employers than litigation in the event of an employment dispute or labor grievance. Arbitration also gives businesses the opportunity to reduce the risks of bad publicity and ensure that the outcome is not in the hands of an unpredictable jury. 

For these reasons, Arbitration agreements are favored by employers as time-saving and cost-saving measures — but they must be appropriately enforced.

What Is an Arbitration Agreement?

Arbitration agreements are legal contracts that essentially require both sides of a dispute (employer and employee) to resolve the matter through an agreed-upon mandatory arbitration process rather than a lawsuit. The process will be defined in the agreement.

What is Arbitration?

In function and purpose, private arbitration is similar to a court trial, although it is less formal and does not have a judge or jury. A neutral third party agreed upon and selected by the parties is instead used to evaluate and decide the dispute. It can often move faster than a court case due to the less onerous rules. For instance, the parties may not need to follow any rules of evidence (unless they’ve agreed to).

Can I Require Employees to Sign a Mandatory Arbitration Agreement?

You are permitted to ask employees to sign an arbitration agreement and even to make their signature mandatory for employment. Signing of a mandatory arbitration agreement might be a part of your onboarding process, such as reading and signing an employee handbook, NDA, or other documents.

Notably, employees can never be forced to sign. However, employers may opt to only hire or retain individuals who will agree to sign one. If you ask an employee to agree to arbitration and they refuse, you’re left with two options:

• Continue to employ the individual in recognition that, in the event of a dispute, it may result in litigation.
• Terminate the individual’s employment (or rescind your employment offer).

It is up to you as the employer to decide if an arbitration agreement is simply an offered and preferred outcome or if mandatory arbitration agreements are a term of employment. However, when your hiring process involves an employment contract (as opposed to an “at-will” employee), it’s important to ensure a requirement to sign an arbitration agreement does not violate your contractual rights.

Not All Arbitration Agreements Can Be Enforced

It’s possible for an employee to challenge the agreement itself in court if there is any reason it should be deemed unfair. For example, some courts have found that arbitration is more enforceable when agreed before employment has begun — an offer of continued employment may not be enough, on its own, to enforce an arbitration agreement if you ask current employees to either sign one or face termination.

President Biden has also signed a law in 2022 that bans employers from enforcing arbitration for sexual misconduct disputes. Any mandatory arbitration agreements should make it clear they will not apply in such a situation.

While the Federal Arbitration Act broadly favors arbitration, some states (CA, NY, IL, WA, MD, NJ, VT) have enacted local laws to further limit the use or enforceability of mandatory arbitration. This creates tension with the federal law, and in some cases may allow employers to challenge the state law.

Pros and Cons of Arbitration Agreements

Should My Company Have One?

Arbitration agreements are falling out of favor as a business practice. The legal status of these agreements is also somewhat fluid, with tension between certain state and federal laws. It is wise for employers to take careful steps in their application to stay in compliance. With that said, they’re a viable and potentially helpful tool for employers in the right situation.

Consult with legal counsel if you have more questions or want more specific information about the legal aspects or conventions of arbitration agreements in your area and industry. It’s always a good idea to use a comprehensive case management system to keep all of your arbitration documentation in one place for a smoothly organized arbitration process.