What Is a Mandatory Arbitration Clause?
A mandatory arbitration clause requires the employer and employee to resolve any disputes through private arbitration rather than through the public court system. When an employment agreement includes this provision, the employee waives their right to file a lawsuit in court and instead must present their claims to a neutral arbitrator who issues a binding decision.
Mandatory arbitration has become increasingly common in employment agreements. Estimates suggest that more than 60 million American workers are covered by mandatory arbitration provisions.
How Employment Arbitration Works
Filing a Claim
The process typically begins when one party files a claim with the designated arbitration provider (such as the American Arbitration Association or JAMS). The filing includes a description of the claims and the relief sought.
Selecting the Arbitrator
The parties select an arbitrator, usually from a panel provided by the arbitration service. Both sides can typically strike candidates and rank their preferences. The arbitrator is usually an experienced attorney or retired judge with expertise in employment law.
Discovery
Discovery in arbitration is more limited than in court litigation. The parties may exchange relevant documents and take a limited number of depositions. The scope of discovery is usually determined by the arbitrator and governed by the arbitration rules.
The Hearing
The arbitration hearing resembles a simplified trial. Both sides present opening statements, examine and cross-examine witnesses, introduce evidence, and make closing arguments. The rules of evidence are typically relaxed compared to court proceedings.
The Award
After the hearing, the arbitrator issues a written decision (called an award) that is binding on both parties. The award may include damages, injunctive relief, and attorney's fees. Judicial review of arbitration awards is extremely limited.
Arbitration awards are very difficult to overturn. Courts will typically only vacate an award if there was fraud, corruption, the arbitrator exceeded their authority, or the arbitrator exhibited evident partiality. Disagreement with the arbitrator's factual findings or legal conclusions is generally not grounds for overturning an award.
Advantages of Arbitration
Speed
Arbitration cases typically resolve in 6 to 12 months, compared to 1 to 3 years or more for court litigation. Faster resolution benefits both parties by reducing uncertainty and ongoing legal costs.
Cost
While arbitration is not inexpensive, it is generally less costly than full-scale court litigation. Limited discovery, streamlined procedures, and shorter timelines all contribute to lower overall costs.
Privacy
Arbitration proceedings are private. Unlike court cases, where filings and proceedings are public record, arbitration claims, hearings, and awards are not part of the public record. This benefits employers who want to avoid public attention and employees who want to keep personal matters private.
Expertise
Arbitrators are selected for their expertise in employment law. Unlike a jury of laypersons, an employment arbitrator understands the legal standards, industry practices, and relevant precedents. This can lead to more predictable and legally sound outcomes.
Finality
The limited grounds for appealing arbitration awards means that disputes are resolved with finality. While this can be a disadvantage for the losing party, it eliminates the years of appellate litigation that can follow a court verdict.
Disadvantages of Arbitration
Limited Discovery
Restricted discovery can disadvantage employees, who typically have less access to relevant evidence. Employment discrimination and harassment cases often depend on evidence in the employer's possession, and limited discovery may make it harder to obtain that evidence.
No Jury
Employees lose the right to a jury trial. Juries are sometimes perceived as more sympathetic to employees, particularly in cases involving emotional testimony or egregious employer conduct.
Arbitrator Fees
The arbitrator's fees can be substantial — often $300 to $500 or more per hour. These costs are borne by the parties (usually the employer pays the bulk of them, as discussed below).
Perception of Bias
Critics argue that mandatory arbitration creates a structural bias in favor of employers. Employers are "repeat players" who use arbitration regularly, while employees are one-time participants. Some studies suggest that repeat-player dynamics may influence arbitrator decision-making, though the evidence is debated.
Limited Appeal Rights
The inability to appeal an unfavorable award is a significant disadvantage for whichever party loses. If the arbitrator makes an error of law or fact, there is generally no remedy.
To address concerns about fairness, make sure your arbitration clause follows due process protections. At minimum, the clause should allow adequate discovery, permit the arbitrator to award the same remedies available in court, and require the employer to pay the majority of arbitration costs.
Enforceability Requirements
Courts will enforce mandatory arbitration clauses in employment agreements, but they scrutinize them for fairness. Key enforceability factors include:
Mutual Obligation
The arbitration requirement should apply to both parties — not just the employee. A clause that requires the employee to arbitrate while preserving the employer's right to litigate is more likely to be struck down as unconscionable.
Cost Allocation
The employer should pay all arbitration costs beyond what the employee would have paid as court filing fees. Requiring employees to split arbitrator fees creates a barrier to pursuing claims and may render the clause unenforceable.
Available Remedies
The arbitration clause should not limit the remedies available to the employee. If the employee could recover compensatory damages, punitive damages, and attorney's fees in court, they should be able to recover the same in arbitration.
Adequate Discovery
While arbitration involves more limited discovery than court litigation, the clause should not restrict discovery to the point where the employee cannot effectively present their case.
Neutral Arbitrator Selection
The process for selecting the arbitrator must be fair and give both parties equal input. A clause that gives the employer sole authority to select the arbitrator is likely unenforceable.
Independent Administrator
Using a recognized arbitration service (AAA, JAMS) with established employment arbitration rules provides a framework of procedural fairness that supports enforceability.
Class Action Waivers
Many arbitration clauses include a class action waiver — a provision requiring employees to bring claims individually rather than as part of a class or collective action. The Supreme Court upheld the enforceability of class action waivers in employment arbitration in its 2018 Epic Systems decision.
However, class action waivers remain controversial and face challenges in specific contexts:
- The NLRB has historically argued that class action waivers interfere with employees' Section 7 rights to engage in concerted activity (though this position has shifted across administrations)
- Some state laws restrict or limit class action waivers in certain types of employment claims
- Public perception of class action waivers can affect employer reputation and recruiting
Special Considerations
Opt-Out Provisions
Some employers include an opt-out provision that allows employees to decline mandatory arbitration within a specified period (usually 30 days) after signing the agreement. This demonstrates fairness and can help with enforceability.
Carve-Outs
Common carve-outs from arbitration include:
- Claims for workers' compensation benefits
- Unemployment insurance claims
- Charges filed with government agencies (EEOC, DOL)
- Claims for injunctive relief related to confidentiality or non-compete violations
State-Specific Restrictions
Some states have enacted laws restricting mandatory arbitration in employment agreements:
- Several states have attempted to ban mandatory arbitration for sexual harassment claims (though federal preemption under the FAA is an ongoing legal issue)
- The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (EFAA) allows employees to void arbitration agreements for sexual harassment and sexual assault claims
Drafting Checklist
When drafting an arbitration clause for your employment agreement, address:
- Scope — Which claims are covered and which are excluded
- Provider — Which arbitration service will administer the process
- Rules — Which set of arbitration rules apply
- Location — Where the arbitration will take place
- Arbitrator selection — The process for choosing the arbitrator
- Discovery — The scope of pre-hearing discovery
- Costs — How fees are allocated between the parties
- Remedies — Confirmation that the arbitrator can award all remedies available at law
- Confidentiality — Whether proceedings and awards are confidential
- Class action waiver — Whether individual arbitration is required
Best Practices
- Use a recognized arbitration provider with established employment rules
- Pay the employer's share of arbitration costs
- Make the obligation mutual — Both parties must arbitrate
- Allow adequate discovery for a fair process
- Do not limit available remedies — The arbitrator should have full authority
- Include a severability clause — If one part is unenforceable, the rest survives
- Comply with state and federal restrictions — Especially regarding sexual harassment claims
- Communicate clearly — Ensure employees understand and acknowledge the arbitration provision
Arbitration clauses offer real benefits — speed, cost savings, privacy, and finality. But they must be drafted carefully to be both enforceable and fair. A well-balanced arbitration provision serves both the employer's and the employee's interests in resolving disputes efficiently.