Arbitration Agreements in Employment Contracts & Their Legal Impact

Arbitration is a method of alternative dispute resolution. There are both positive and negative aspects of arbitration, but generally, arbitration is more favorable to employers than employees. Under the Federal Arbitration Act, arbitration agreements involving foreign commerce or interstate commerce are considered valid, irrevocable, and enforceable, except when there are legal or equitable grounds to revoke the contract. Under the FAA, an arbitrator's decision will be binding. There are also state laws that cover arbitration.

Arbitration Clauses

It is now very common for employers to include an arbitration agreement in employment contracts. However, before employers default to including arbitration agreements in all of their employment contracts, they should be sure to understand how an arbitration proceeding differs from a trial in a court of law in ways that can prove significant.

Arbitration Proceedings

At arbitration, an arbitrator will hear your matter. This is a private citizen, who is a neutral third party. It may be a retired judge or a lawyer who is hired to hear arguments and receive evidence from both sides before making a determination. In most cases, the arbitrator's decision is binding. Although arbitrators will follow the law, in many cases, juries are more sympathetic to employees than judges or arbitrators are. This is why, in most instances, employment attorneys representing workers would rather take a case to trial before a jury than before a judge or arbitrator.

Additionally, in contrast to the discovery process when the matter is proceeding to trial, you are limited in the information that you can get from the other side in arbitration. Usually, not being able to request as many documents and as much evidence severely disadvantages an employee, since employers tend to possess most of the information and documents associated with a lawsuit. However, there may be instances where the inability to access and review certain evidence instead hinders the employer.

Risks of Using Arbitration

Unlike a judgment, arbitration is not subject to appeal. In most cases, it is absolutely final. Even if you believe that the decision was unfair or the arbitrator was biased against you, you will not be able to bring this matter before a higher court, as you might if you got an adverse ruling at trial. Routinely, court decisions are appealed to higher courts. However, if you do not like what happened at arbitration, there is usually no higher authority that you can ask to review the case, unless there is something wrong with the employment agreement and the arbitration provision in it.

On the other hand, arbitration proceedings are less formal than trials and usually significantly less expensive. They also take less time; proceeding to trial could result in the matter taking a year or more to resolve.

Negotiating Arbitration Provisions

In most cases, an employer will not be willing to negotiate over the arbitration provision, since arbitration tends to favor the employer. Employees or potential employees may, however, ask an attorney to negotiate a more favorable arbitration provision, such as using a better method for choosing a fair arbitrator or requiring that arbitrators disclose any conflict of interest. It may be possible to include a provision to allow a party to seek damages for emotional distress and punitive damages.

Last reviewed October 2024