Mandatory arbitration clauses in employment contracts are used to enforce things like non-compete agreements, disputes over earnings, workplace discrimination, and even sexual harassment. Employers often find arbitration a better choice than a court hearing because it's less expensive and there's less conflict involved. With arbitration, an outside party, or parties, with experience relevant to the situation listen to each side's argument and then deliver binding decisions to resolve the matter.

Arbitration in Business

Arbitration is used to settle many business-related disputes, covering things related to issues such as collections accounts, defective products, and almost anything that could spur a lawsuit. Mandatory arbitration agreements are included in almost every:

  • Consumer contract
  • Credit card agreement
  • Lease agreement

The inclusion of arbitration language in the contract keeps any disagreements that arise out of the courts and puts the issues in front of arbitrators who are professionals.

Another business aspect of arbitration clauses is their presence in employment contracts. Big and small businesses include arbitration language in employee handbooks and other forms of employment contracts as a way to keep court costs to a minimum in the event of an employee/employer disagreement.

Arbitration Awards

When a contract contains a mandatory arbitration clause, any conflict that comes up between the parties who agreed to the clause, has to be heard and resolved by a neutral arbiter instead of a judge. The neutral third party, the arbitrator, goes over all evidence, rules on the outcome of the hearing, and announces if money is owed to either party. Money owed as a result of arbitration is called an arbitration award. All this is completed at a lower cost than going to court.

Arbitration Contract Language

If given an employment agreement with a mandatory arbitration clause, the employee should carefully review and understand the information included in it. The employee contract can't bar the employee from submitting a claim to an agency that handles prosecuting employment grievances, such as the United States Equal Employment Opportunity Commission. It can, however, prevent an employee from submitting a claim against the employer to an administrative agency, like the Labor Commissioner in a given state.

Consumer Advocates Against Arbitration Clauses

With the number of wage and hour lawsuits rising, a lot of employers are adding arbitration agreements to their employment contracts in an effort to avoid class action lawsuits and keep the costs of legal defense down. As an alternative to a lawsuit, it has different possible implications than a court hearing in front of a judge or a jury trial.

Consumer advocates, for example, feel the fact that companies are the ones paying the arbitrators makes it harder for the employees to get a fair ruling. Consumer advocates also feel a mandatory arbitration agreement keeps the employee in a disagreement from getting the deserved result.

Deterrent to a Class Action Suit

Because arbitration is expensive, smaller disputes get put aside because it isn't worth the expense. This can be a deterrent to the type of class action lawsuits that would normally be used to address something like poor treatment of an entire workforce, where each employee would only receive a small amount of money.

A mandatory arbitration clause in an employee contract stops employees from banding together to file class action lawsuits. When there's an arbitration clause in place, each case has to go through arbitration on its own before it can be taken through the court system.

Potentially Lower Award Amounts

While claims can't be fully assessed for validity, some consumer advocates who work against employee arbitration agreements say employees receive lower award amounts when arbitrators handle a case instead of a judge or jury. The reason the issue is hard to validate is the privacy level of an arbitration hearing. It's difficult to get accurate information on the results of a private arbitration session.

Consumer advocates also note that some employers bury employee arbitration clauses deep within the text of long documents that have nothing to do with the topic, leaving employees in the position of signing away the right to take disputes to court without knowing they have given up that right.

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