Understanding Employment Arbitration Agreements

Employment arbitration agreements have become increasingly more popular among employers attempting to minimize employee lawsuits.

These arbitration agreements require employees to waive their right to file a lawsuit, instead agreeing to have any disputes heard by a neutral arbitrator who then makes a binding ruling.

Some employers require all disputes to go to arbitration, while others use arbitration for only particular issues. Most employment agreements use “binding” arbitration, where both sides agree in advance that the arbitrator’s decision is final, with very limited basis to appeal the decision.

However, not all employment arbitration agreements are legally enforceable.  Although the judicial system has long favored arbitration agreements as a means to keep civil lawsuits off the court dockets, government agencies such as the EEOC often challenge these agreements on the basis of unequal bargaining power between the employer and employee.

While case law on the subject varies in from state to state, arbitration agreements that are too one-sided in favor of the employer are often struck down in court on the basis that the agreement was unenforceable since it could not be viewed as having been arrived at through mutual assent in the context of an equal relationship.

The “knowing” element required for an arbitration agreement to be enforceable is an issue of informed consent. Employment arbitration court decisions have been split on whether or not words are sufficient to inform people of any rights they are waiving, or if individuals must be given and understand actual examples of the rights they are waiving.

Employees should sign a separate arbitration agreement, not just language in an employer handbook, that details each of the federal and state provisions they will be waiving their rights under.

In the case of union agreements, all the disclosures in the world may not save an arbitration clause, since when a union represents an individual in arbitration proceedings, it has to consider the interests of all of its members, which may be in conflict with the individual.

Finally, the arbitration agreement should not be an attempt to limit the exposure of the employer, but rather a mere alternative means to resolve the dispute.  Consequently, provisions prohibiting an award of punitive damages, or stating that the damages may not exceed one year’s wages, will not likely be upheld, since they serve as red flags that the employer was trying to strip the employee of their legal rights.

If you need to draft an employment arbitration agreement, click this affiliate link to search for a template.

The information on this website is intended as general legal information only and should not form the basis of legal advice of any kind. Individuals seeking specific legal advice should consult a lawyer.

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New Jersey lawyer turned blogger, podcaster and legal changemaker.