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Employment Newsletter

Binding Arbitration in Employment Agreements

Arbitration is an alternative to court action. The dispute is submitted to one or more neutral third persons (arbitrators), who consider the evidence and relevant law and issue a decision, just as a court would. The arbitration decision is usually final and binding, appealable only under limited circumstances.

Although arbitration clauses are common in union-labor contracts, for numerous reasons, non-union employers are beginning to use such clauses much more frequently. Employers generally find arbitration desirable since it is typically less time-consuming and less costly. In addition, it is more private since the details of the arbitration decision are usually not made public. As a result, and especially in light of a U.S. Supreme Court decision upholding enforceability, more and more employers are including arbitration clauses in their employment contracts, applications, and manuals.

Arbitration Clauses

Provisions mandating arbitration typically indicate that the employer and employee agree to submit any future disputes between them to arbitration, often through a specified organization, such as the American Arbitration Association. This is commonly done before the employee starts work and before there is any dispute. Such clauses generally require mandatory submission to binding arbitration, meaning that the dispute cannot be pursued in a court and the arbitration decision will be final.


When a dispute arises, such as an allegation of discrimination, the employee typically sends a written demand for arbitration and a filing fee to the arbitrating organization specified in the agreement. The employer then usually has a short time to respond to the complaint (or assert a counterclaim). At this point, parties either have the option of electing an arbitrator or one is appointed to them.

The arbitration itself usually proceeds in a manner similar to a regular trial. There are exhibits and witnesses, and it may be transcribed or taped. In addition, there are opening and closing statements, examination of witnesses, and introduction of evidence. Despite these similarities, the general rules of litigation and evidence are typically relaxed.


Enacted in 1925, the Federal Arbitration Act made arbitration clauses enforceable, except in cases involving “contracts of employment of seamen, railroad employees, or other class of workers engaged in foreign or interstate commerce.” Traditionally, most courts read this exception narrowly such that most employment contract arbitration clauses were held enforceable. However, the U.S. Supreme Court determined that the exception was very narrow, and that most clauses are enforceable.

As a result of this decision, employees are usually forced to accept the clause as written. However, many state courts are unwilling to enforce contracts with one-sided terms that are forced on people. Some state courts have placed conditions on enforceability, based on inclusion of more fair provisions, and refuse to enforce arbitration agreements deemed unfair or “unconscionable.”

Employee Distaste With Arbitration Clauses

Arbitration is unquestionably less favorable to employees than court action in many ways. There is no right to a jury, which is often more sympathetic to the “David” employee fighting a “Goliath” employer. Further, the employee has little control over the arbitration procedures and process, and there are very limited rights of appeal from arbitrators’ decisions.

The Supreme Court decisions, however, seem to ensure that employers will continue and even increase use of arbitration clauses for the foreseeable future. There appears to be no reason why employers should not consider having arbitration clauses in their employment contracts and applications.

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