Updated November 27, 2020:

What Is an Arbitration Agreement?

An arbitration agreement is a contract that states two or more parties agree to settle a conflict outside of court.

Characteristics of Arbitration Agreements

Arbitration agreements cover anything that would normally be solved through legal proceedings. These agreements are sometimes just a statement or provision in a larger contract agreeing to use arbitration if the situation arises.

Disputes requiring arbitration typically include the following:

  • Performance of a contract
  • Faulty product
  • Unfair or illegal treatment in the workplace

Reasons to Consider Not Signing an Arbitration Agreement

Typically, employers will put an arbitration agreement into a contract because this process often benefits the employer. The employer will require the employee to sign an arbitration agreement, and many times the employee won't think it's a big deal, but these agreements could be a determining factor in winning or losing a future case.

Many times, the differences between an arbitration agreement and a jury trial work against the employee. An arbitrator, typically a retired judge, hears the case instead of a jury. Juries tend to be more sympathetic to employees, so arbitration may hurt an employee's chances of winning.

Also, arbitration cases, unlike court cases, cannot be appealed under most circumstances. Even if employees disagree with an arbitration decision, they don't have the chance to appeal to a higher court, which might rule for them instead of the employer.

Reasons to Consider Signing an Arbitration Agreement

Although incoming employees can refuse to sign an arbitration agreement, the employer can rescind the offer of employment without it. At-will employees can also be fired if they don't sign one. Prospective employees may negotiate this point if they are desirable candidates, but it could be risky.

Furthermore, arbitration agreements have the following advantages over court trials:

  • Arbitration is less formal, making the process easier for everyone including the employee.
  • Court cases can take several years. Arbitration is heard and decided much faster.

Employees sometimes sign arbitration agreements without realizing it because of the stacks of paperwork during the hiring process. Many employers disclose the arbitration agreement upfront, while others bury it in hiring letters, handbooks, and employee contracts.

As a prospective employee, you can have an attorney look over any contracts you sign. An employee shouldn't sign anything without reading and understanding it. If it's too complex, a lawyer should look at the contract and outline and explain the important points before an employee signs any contract.

Employees have the right to attorney representation during the arbitration process.

An arbitration agreement doesn't always limit an employee's ability to take an employer to court. The employee can still file a complaint with the Equal Employment Opportunity Commission. The EEOC can sue your employer on your behalf. Arbitration agreements don't extend past the employer or employee.

Arbitration Agreements: Terms You Should Know

  • Forced Arbitration is an arbitration agreement required by an employer as a condition of employment. There is no legal need for the employee to accept this condition, but often the only other choice is not to take the job.
  • Choice of Arbitrator defines the right for the employee to have an equal say along with the employer in the choice of arbitrator. This term is important since the employee likely can't appeal the decision. Both employer and employee should be able to decide against one arbitrator each without question.
  • Disclosure of Information refers to any potential arbitrator disclosing information about personal and business interests to make sure the arbitrator doesn't have extenuating circumstances or a bias that might sway a decision.
  • Costs of Arbitration defines the idea that the employer should be financially responsible to pay for arbitration since it's typically the employer who wants to use it.
  • Remedies Available ensure that an employee can receive the same remedies they would have received if they had filed a claim in court.

Arbitration Agreement Unconscionability

There are two main types of unconscionability when referring to arbitration agreements.

1. Procedural Unconscionability refers to how the parties formed the arbitration agreement.

Courts sometimes limit the ways that an employee agrees to an arbitration. The courts have deemed the following procedurally unconscionable:

  • The time an employee had to review the agreement
  • If the employee was able to speak to an attorney about the rights the employee would give up
  • Whether the employee was threatened with the loss of job or job benefit if they did not accept the agreement or provision
  • If the employer downplayed the agreement as not important, not worth reading, or just another form
  • Whether the agreement was likely intentionally inconspicuous in other documents

2. Substantive Unconscionability examines how fair the arbitration process would be under the agreement for the employee versus using the public courts. It reviews whether arbitration removes opportunity for specific claims and penalties only applicable in a public court, including late payment of wages. Other types of substantive unconscionability that limit the employee's rights may include rights that otherwise might be available without an arbitration agreement.

A claim may be deemed substantively unconscionable if it includes any of the following:

  • Arbitration cost to the employee
  • Limits to the relief of the employee
  • Limits to mutuality (whether both the employer and employee are bound by arbitration)
  • Limits on the available methods to obtain evidence
  • Justification and one-sided results
  • Imbalance for the imposed obligations

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