Should you use arbitration agreements? 3 key points to know

Using arbitration agreements instead of going to court can provide big benefits for employers. Arbitration is generally faster and cheaper than litigation, and it can make it easier to avoid bad press — not to mention the unpredictability of a jury.

But arbitration agreements are becoming increasingly disfavored, and employers must be careful to use them in compliance with a fluid legal landscape. Here’s a quick guide to the lay of the land – and how to get it right.

1. Arbitration agreements are contracts

Remember that an arbitration agreement is a contract between employer and employee. Among other things, a valid contract has to have what is called “consideration,” meaning each side must get something and give up something.

So what’s the consideration for an arbitration agreement? When the agreement is made at the start of employment, the employee gets the job and the employer gets the agreement to arbitrate.

If the agreement is made after employment has begun, things get a little sticky. Some courts have ruled that continued employment is sufficient consideration for an arbitration agreement, while others have decided that continued employment, by itself, is not enough to create an enforceable agreement to arbitrate. Bottom line here: You must know the law of your state on this question.

Another important and applicable law about contracts: A promise to do something to fulfill your contractual obligation has to be real; it can’t be what the law calls “illusory.” So, for example – and as a federal appeals court has ruled — if an employment handbook includes an arbitration provision but the handbook says the employer can modify the arbitration policy at any time, there is no contract and no valid agreement to arbitrate.

Best practice: Make the arbitration agreement part of the hiring/onboarding process so that it is clear it is a contingency of initial employment.

2. Don’t try to force arbitration of sexual harassment disputes.

In March of 2022, President Biden signed the federal Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021. This law bans employers from forcing arbitration of what the law calls a “sexual assault dispute” or a “sexual harassment dispute.”

Employers may not include mandatory arbitration provisions relating to these situations in contracts of employment.

Any arbitration agreement between an employer and employee should explicitly state that it does not apply to any dispute involving alleged sexual misconduct.

3. Federal law favors arbitration, but …

A federal law known as the Federal Arbitration Act generally favors arbitration agreements. But in addition to the carve-out created by the new federal law banning arbitration of matters involving alleged sexual misconduct, several states have taken action to limit the use of mandatory arbitration to resolve employment-related disputes.

The move by some states – including California, New York, Illinois, Washington, Maryland, New Jersey and Vermont – to limit the use of arbitration creates a natural tension with the Federal Arbitration Act, which favors the use of arbitration.

To the extent that these laws ban arbitration of disputes related to alleged sexual misconduct, they are now co-extensive with federal law and do not create tension between the two.

But state laws that ban mandatory arbitration more broadly can be challenged on the ground that the Federal Arbitration Act preempts their application. This is because federal law trumps contrary state law.

What does this all mean?

It’s fair to say that mandatory arbitration of employment-related disputes is in the doghouse, but it’s also accurate to say that it remains a perfectly valid and potentially useful tool for employers.

It is also a tool that is becoming increasingly fraught with potential pitfalls for employers.

To steer clear of issues, here are some best practices:

• Get it early. Instead of dealing with the problems that may arise in connection with trying to implement mandatory arbitration for existing employees, make arbitration agreements part of the hiring process via a separate, standalone document.
• Make it clear that the agreement does not apply to disputes involving alleged sexual misconduct.
• Include language that says the agreement does not prevent employees from filing unfair labor practice charges with the National Labor Relations Board; EEOC administrative charges of employment discrimination; claims for unemployment benefits; or claims for workers’ compensation benefits.
• Do not include an arbitration policy only in a handbook that you can unilaterally alter.
• Use clear and straightforward language, and set off the language from any other nearby language, such as by using capital letters and bolding.
• Learn the requirements of your state’s law. This is as important as anything else you do, especially in light of differing state-law rules.