What Is Employment Arbitration?
Employment arbitration is a form of alternative dispute resolution (ADR) in which employment disputes are resolved by a neutral third-party arbitrator instead of through the court system. Many employers require employees to sign arbitration agreements as a condition of employment, waiving their right to file lawsuits or participate in class actions.
For HR professionals studying for the SHRM-CP or SHRM-SCP exam, understanding arbitration agreements is important within the broader topics of employee relations, conflict resolution, and legal compliance. The SHRM exam may test your knowledge of enforceability standards, practical considerations, and the advantages and disadvantages of mandatory arbitration.
Arbitration is governed primarily by the Federal Arbitration Act (FAA) of 1925, which establishes a strong federal policy favoring arbitration. The Supreme Court has repeatedly upheld the enforceability of arbitration agreements in the employment context.
Enforceability of Arbitration Agreements
While courts generally favor arbitration, certain requirements must be met for an employment arbitration agreement to be enforceable:
- Mutual consent: Both parties must agree to arbitration, though courts have upheld agreements signed as a condition of employment. The key is that the employee must be aware they are agreeing to arbitrate disputes.
- Adequate consideration: The agreement must be supported by consideration. In most jurisdictions, continued employment or the mutual promise to arbitrate constitutes sufficient consideration.
- Substantive fairness: The agreement must not be unconscionable. Courts examine whether the terms are so one-sided as to be oppressive. Factors include whether the agreement applies equally to both parties, whether it limits available remedies, and whether it imposes excessive costs on the employee.
- Procedural fairness: The circumstances of signing must be fair. Presenting an agreement in a way that prevents the employee from reading or understanding it may render it unenforceable.
Notable exceptions to enforceability include:
- Claims under the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (2022), which allows employees to choose whether to arbitrate or litigate sexual assault and sexual harassment claims.
- Some states have enacted laws limiting mandatory arbitration, though federal preemption under the FAA may override these state restrictions for certain claims.
Advantages and Disadvantages for Employers
HR professionals should understand the trade-offs of mandatory arbitration:
Advantages:
- Faster resolution compared to litigation
- Lower costs in many cases
- Private proceedings (no public trial or court records)
- Reduced risk of large jury verdicts
- Class action waivers can prevent costly aggregate claims
Disadvantages:
- Limited discovery may hinder the employer's ability to build a defense in some cases
- Limited appeal rights make it difficult to challenge an unfavorable award
- Employee perception may be negative, affecting morale and recruitment
- Arbitration fees and arbitrator costs can be significant
- Repeat-player bias concerns (employers who frequently arbitrate may receive favorable treatment)
Best Practices for HR
If your organization uses arbitration agreements, HR should ensure they are properly designed and administered:
- Clear and conspicuous language: The agreement should clearly state that the employee is waiving their right to a jury trial and agreeing to resolve disputes through binding arbitration.
- Separate document: Consider presenting the arbitration agreement as a standalone document rather than burying it in an employee handbook or onboarding packet.
- Mutual obligation: The agreement should require both the employer and the employee to arbitrate covered disputes.
- Preserve statutory remedies: The agreement should not limit the types of relief available under applicable statutes (such as back pay, compensatory damages, or attorney's fees).
- Neutral arbitrator selection: The process for selecting an arbitrator should be fair and neutral, typically through a reputable arbitration organization such as the American Arbitration Association (AAA) or JAMS.
- Employer pays costs: To avoid unconscionability concerns, the employer should bear the costs of arbitration beyond what the employee would have paid in court filing fees.
Start Practicing Today
Arbitration and ADR topics appear on the SHRM certification exam, which consists of 134 questions over 4 hours at Prometric or OnVUE. Know the enforceability standards, recent legislative changes, and the practical considerations for implementing arbitration programs.
SHRMpractice.com offers practice questions on arbitration, mediation, and other dispute resolution topics. Take our diagnostic assessment to evaluate your knowledge, and create your account to access our full question bank.