What Is an Arbitration Agreement?
An arbitration agreement is an element of an employment agreement or commercial agreement that mandates the resolution of specific types of disputes by the parties via private arbitration rather than through the courts. In layman’s terms, an agreement to arbitrate will likely deprive you of the right to have a judge or jury determine your claims.
Many employees sign documents indicating that they agree to receive benefits from the employer, but they are unaware that these documents also contain an employment arbitration agreement. For an arbitration agreement to be eligible for enforcement, the language must provide the employee sufficient notice of the following items:
- That disputes will be resolved in a private forum rather than court
- Who will pay arbitration fees
- Which arbitration organization such as AAA or JAMS will administer the case
- Where the arbitration will occur
- How many arbitrators will hear the case
- Who decides whether the arbitration agreement itself is valid
Before signing any arbitration agreement in employment contracts, understanding this is critical.
Arbitration Agreements Explained
An arbitration agreement will move dispute resolution away from the public court system to a private arbitrator. Many employees prefer to use courts for dispute resolution rather than arbitrators because of the advantages of jury trials and broader discovery allowed in court. On the other hand, arbitration is generally quicker than litigation but also significantly narrower in scope than litigation.
Employers use arbitration agreements to reduce litigation risk and retain control over litigation costs. However, employees may not fully comprehend the ramifications of an arbitration agreement and will likely experience some negative effects over time.
Arbitration Agreements in Employment Contracts
Workplace documents contain many arbitration agreements; this is usually presented as a standard term of employment and as a non-negotiable condition even for senior employees.
Where You Will Find an Agreement to Arbitrate
You may encounter an agreement to arbitrate in:
- Employment agreements
- Offer letters
- Equity or stock grant documents
- Employee handbooks
- Separation agreements
- Bonus or incentive plans
Arbitration could be hidden deep within lengthy contracts and workers often forget to review these agreements during the hiring process.
What Does an Arbitration Agreement Mean to You
As an employee or executive, you may wonder why this information is so important. Generally speaking, employees prefer to resolve their disputes through the public court system rather than through arbitration. Arbitration drastically alters the way disputes are resolved.
In addition to the higher cost of arbitration filing fees compared to court filing fees, employees may not understand the financial or procedural effects of a single arbitrator making the award versus having a jury make the award.
Also, another area to consider is whether or not the arbitrator will be neutral. Most arbitrators have law practices that have represented employers during the majority of their careers. Therefore, although arbitrators are supposed to be unbiased, many employees feel that the arbitration is not a truly neutral forum in which to resolve their dispute.
Pros and Cons of an Arbitration Agreement
Understanding the pros and cons arbitration presents can help employees make informed decisions.
Pros of an Arbitration Agreement
- Arbitration is often faster than court litigation
- Proceedings are private rather than public
- Discovery may be more limited and streamlined
- Scheduling can be more flexible
- Final resolution may occur sooner
Cons of an Arbitration Agreement
- You waive your right to a jury trial
- Appeal rights are extremely limited
- Arbitration fees can be substantial
- Discovery may be restricted
- The process is private and not publicly searchable
These tradeoffs make it essential to understand the agreement to arbitrate meaning before signing.
How Arbitration Works in Practice
The majority of employment arbitration disputes are administered by service providers such as JAMS or the American Arbitration Association (AAA) that provide lists of qualified arbitrators and establish procedural rules for the arbitration process.
An arbitration proceeding begins once arbitration is requested. The parties to the arbitration then select the arbitrator, participate in limited discovery, present evidence to the arbitrator and receive a binding decision from the arbitrator. The filings made in an arbitration proceeding and any result that occurs in an arbitration proceeding are generally confidential.
Example of Arbitrator and Arbitration Process
When it comes to how courts analyze arbitration agreements, one constant is that recent case law will influence how courts will analyze arbitration agreements in the future. In the most recent case to take center stage in this issue, Henry Schein v. Archer and White Sales, the U.S. Supreme Court ruled that it is up to the parties to determine whether or not a dispute should go to arbitration instead of a court. The court also affirmed a Fifth Circuit’s finding determining that, under specific conditions, the courts can decide whether a dispute can even be arbitrated.
Why is this significant to you? Because an arbitrator may be less likely to send your case back to you to litigate in court because they want to keep your dispute in front of them because they will make money from the hearing.
In a second example, Amazon decided to remove its arbitration agreement provisions from their customer agreements after receiving tens of thousands of individual arbitration requests against them. The sheer number of requests created administrative expenses that were significant enough to highlight how arbitration could create unforeseen financial responsibilities for a company.
Final Takeaways
In many contracts of employment, employers use arbitration agreements to avoid disputes being heard in the public courtroom system. Additionally, courts will routinely uphold these provisions because of the large overage of work within the court system.
Therefore, you are not always going to be able to get rid of an arbitration agreement. However, recent case law suggests that courts may play a significant role in deciding whether or not certain claims will need to go through the arbitration process.
The most important takeaway from this post is straightforward: make sure before you sign anything. The use of arbitration agreements has a very large impact on your legal rights as well as the cost of enforcement and your overall strategy for success in litigation.
Review Your Employment Agreement
It’s a good idea to consider reviewing any formal employment agreement with a qualified attorney before signing any employment documents. A knowledgeable attorney will help you understand the contractual terms of the arbitration agreement, and thus, if there are any potential issues with this agreement that could be adverse to you, and advise you about the possibility of negotiating changes, if applicable.
If you have questions about an employee arbitrating agreement or need assistance in reviewing your employment contract, Hamilton Law Firm can help you with that.
To speak with our attorney and have your questions answered, you can reach us by visiting our contact page and requesting a free consultation.