What Is an Arbitration Clause and Should You Sign an Employment Arbitration Agreement?

Tylene Welch  | 

Are you in the midst of a dispute with your employer? Maybe you’re considering litigation, but you’re unsure of your rights to file a lawsuit. Or you just got a new employment contract, and there’s an arbitration clause in it. What do you do?

In this article, we’ll explain what arbitration is, and how it can benefit or harm your case. We’ll discuss the arbitration clause, pros and cons of an employment arbitration agreement, how to spot it in your contract, and what you can do about it. Let’s get started.

What Is Arbitration?

Arbitration is an alternative to litigation. In arbitration, involved parties meet with a third-party mediator or arbitrator who is trained in dispute resolution techniques. The arbitrator’s main role is to help facilitate a discussion that leads to a settlement of the dispute. This method can be used to resolve legal disputes such as:

Rather than resolving a legal dispute in court, you might choose arbitration because it can be beneficial for all involved parties. Generally, arbitration is simpler, cheaper, and resolves quicker than litigation. However, this is not always the case. Resolutions can be unfair to one or more of the involved parties, particularly in cases with a dispute between an individual and a company (or employer).

What Is an Arbitration Clause?

Arbitration can be voluntary or mandatory, otherwise called “binding arbitration.” In binding arbitration, you do not have the option to sue if you are unsatisfied with the arbitrator’s decision, and the conclusion is enforceable by law.

An arbitration clause is added to contracts in order to avoid litigation and enforce binding arbitration. This is commonly found in terms of agreement and contracts for:

  • Employment
  • Insurance
  • Home-building
  • Car loans and leases
  • Credit cards
  • Retirement accounts
  • Investment accounts
  • Nursing facilities

But that’s just a few of the more common situations you might see an arbitration clause used. You’re most likely to find an arbitration clause in an employment contract.

Employment Arbitration Agreements

It is not uncommon for employers to add an arbitration clause to their employment contracts. If you signed an employment arbitration agreement, you likely signed away the right to file any lawsuit against your employer, even if you feel you were wrongfully terminated. Arbitration agreements state that you agree to resolving any dispute you may have with your employer through arbitration. However, this also binds your employers to resolve disputes in arbitration.

The arbitration clause can be difficult to find in long contracts full of legal jargon. Look for terms like, “mandatory arbitration,” “binding mandatory arbitration,” “employment arbitration agreement,” or even something like, “dispute resolution mechanism.”

Should You Sign an Employment Arbitration Agreement?

Let’s look at some pros and cons of employment arbitration agreements. Some of the disadvantages of signing an employment arbitration agreement include:

  • Your dispute will not be held in court and judged by a jury of your peers. Instead, the resolution will be finalized by a single arbitrator, which may be a disadvantage.
  • It may be more difficult to collect evidence, as an employee, because a trial gives more opportunity to request evidence from the other side.
  • Arbitration conclusions are final and can be enforced by law. In litigation, you have the opportunity to appeal the decision made by the court or jury.

That being said, arbitration saves a considerable amount of money and time, something an employer might have the resources to spare, but employees likely do not. Arbitration generally lasts a few weeks to a few months, while litigation can take up to a year or more.

How to Fight Binding Arbitration

You might be able to negotiate removal of the arbitration clause in an employment agreement, or agree to sign the agreement with certain modifications. Ultimately, that will be up to the company or employer. You may want to consult with an attorney if you wish to negotiate an employment arbitration agreement.

However, if you feel your civil rights have been violated, you can make a complaint to a state or federal agency. For example, if you feel that you have been discriminated against by your employer, you can still file a claim with the Equal Employment Opportunity Commission (EEOC). Organizations like the EEOC can file a lawsuit on your behalf, even if you signed an employment arbitration agreement.


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Tylene is a freelancer in Boise, Idaho. She's a self-taught personal finance hacker with zero debt. She eats avocado toast for breakfast.

This post was updated September 17, 2018. It was originally published August 29, 2018.