Binding Arbitration Agreements in Employment Agreements – Pros and Cons

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September 20, 2018

Employers are increasingly requiring their employees to enter into binding arbitration agreements to resolve all disputes that may arise out of the employment relationship.  Courts generally enforce arbitration agreements in the employment context, including claims of discrimination or harassment under Title VII of the Civil Rights Act of 1964 and the California Fair Employment and Housing Act (FEHA).  Reasons for the spread of arbitration in California employment agreements include (1) arbitration documents (unlike court records) do not become public records, (2) arbitrations do not involve a jury; and (3) discovery allowed to parties in arbitration is more restricted than that allowed to parties in court.  These points are particularly popular with employers; however, arbitration also presents many disadvantages from the employer’s perspective, which every employer should consider.

It is generally believed that arbitration agreements are more advantageous for the employer than for the employee.  Indeed, it is almost always the employee who challenges the legality of arbitration agreements in court.  However, Eskridge Law has found that arbitration is not necessarily the better policy for all employers, because arbitration is both lengthy and expensive.  The arbitration process is not always more efficient in terms of time, because courts have sped up many aspects of the litigation process (including allowing telephonic discussions with the judge in some circumstances instead of a motion hearing).  Also, the costs of arbitration are rising as the demand for it grows.

Another consideration in deciding whether to opt for binding arbitration is that the employer is required by law to pay all arbitration fees and expenses for employment disputes. This may encourage employees to bring claims against their employer through arbitration that they would otherwise not file in court due to the expense.

Employers who, despite the above, prefer to avoid the uncertainties of a jury trial and wish to pursue arbitration should have an attorney review their arbitration contracts, and any arbitration clauses in their employment agreements and employee handbooks, to ascertain the legality of their arbitration provisions, because requirements for employment arbitration agreements are particularly stringent in California.

The arbitration agreement must be mutual – that is, both the employee and the employer must mutually agree to arbitrate claims pursuant to the same provisions.  Otherwise there is no agreement, and a court will most likely deem the arbitration clause void.  An arbitration agreement, like all other contracts, must also be conscionable, supported by consideration, and executed without fraud, duress, mistake, or lack of capacity by either party.

Examples of unconscionable arbitration agreements that the California courts have struck down in the past include: agreements that require employees to waive statutory damages or statutory remedies, and agreements that do not allow the employee to recover attorneys’ fees if successful.

The following provisions should appear in any agreement for arbitration of most employment disputes:

  1. Neutral arbitrator:  This requirement can be met by providing that an alternative dispute resolution center, such as Action Dispute Resolution Services or Judicial Arbitration and Mediation Service, will provide to both the employer and the employee a list of potential arbitrators.  If the parties cannot agree on which potential arbitrators to nominate within 30 days, the center shall randomly select the arbitrator to be assigned to the dispute.
  2. Written award:  The arbitration agreement must provide for a written arbitration decision that sets forth the essential findings and conclusions upon which any award is based.
  3. Relief:  The arbitration agreement must provide for all types of relief that are otherwise available in court.
  4. Payment of arbitration fees:  The employer pays arbitrator fees and expenses.  An employee who must agree to arbitration as a condition of employment must not be required to pay arbitrator fees or expenses as a condition of access to arbitration.

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This article is based on the law as of the date posted at the top of the article.  This article does not constitute the provision of legal advice, and does not by itself create an attorney-client relationship with Eskridge Law.