When an employee believes they have been wronged by their employer, there are multiple ways the parties might try to resolve the dispute. They might start with negotiation and, if that doesn’t work, try mediation. If mediation doesn’t work, the employee might agree to try arbitration, or they might file a lawsuit.
But for many employees in the United States, suing is not an option. Increasingly, U.S. employers are requiring workers to sign an agreement to arbitrate—that is, to promise they will resolve any serious disputes with the employer in arbitration rather than filing a lawsuit. This constraint on employees’ ability to sue in the case of discrimination, disability violations, and other grievances has raised concerns about the fairness of mandatory arbitration clauses.
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What Is an Arbitration Agreement?
In the employment arena and beyond, an arbitration agreement is typically a contractual promise between parties that if any dispute arises between them while they are under contract, they will waive their right to sue and instead settle the matter through arbitration.
Seeking to avoid the costs of a protracted lawsuit, organizations sometimes require their employees to sign an agreement to arbitrate. In a 2018 Economic Policy Institute report, Alexander J.S. Colvin estimated that at least 55% of nonunion, private-sector U.S. employees—approximately 60 million—have signed an agreement to arbitrate that prevents them from suing if their legal rights are violated. For companies with more than 1,000 employees, about 65% mandate arbitration.
When employees sign such agreements, they typically lose the ability to sue employers for alleged violations of federal and state statutes regarding employment discrimination and sexual harassment, disability protections, maternity- and medical-leave guarantees, and entitlements to minimum wages and overtime, writes Colvin. In 1991, the U.S. Supreme Court upheld the enforceability of mandatory employment arbitration agreements and, in 2011, enabled employers to shield themselves from employees’ class-action lawsuits as well.
An Uneven Playing Field?
When voluntary, arbitration can be a fair process for employees and employers alike. But when an employer mandates arbitration and closes off lawsuits, employees may be at a distinct disadvantage.
Because mandatory arbitration agreements are often embedded in a much longer employment contract, employees often sign them without reading them closely and find out only after a problem arises that they forfeited their right to sue. Employees who are aware of an agreement to arbitrate may feel pressure to sign it, especially when it is a stated condition of employment.
Moreover, research shows that employers are more likely to win arbitration cases than employees, for reasons that may have more to do with the process than with the strength of employees’ cases. The employer typically controls the process, setting procedures and hiring the arbitrator; as a result, an arbitrator who seeks repeat business may be motivated to side with the employer. The fact that the arbitration process is private can allow companies to avoid scrutiny for their actions. And arbitration decisions are typically binding, which can leave either side without recourse if they lose the case.
By stopping gender- and race-based employment discrimination cases from going to trial, mandatory arbitration may be especially unfair to women and people of color. “Arbitration allows corporations to avoid being properly held accountable for violating anti-discrimination laws,” write lawyers Jean Hyams and Hilary Hammell in a June 2020 Washington Post editorial.
Because of such concerns, in October 2019, the State of California passed a law, AB 51, that prohibits employers from requiring employees to sign an agreement to arbitrate. A district court sided with a U.S. Chamber of Commerce filing that argued the Federal Arbitration Act (FAA) preempts the new California law; this temporarily prevented the State of California from enforcing AB 51. But on September 15, 2021, in a 2–1 decision, the Ninth Circuit Court of Appeals reversed the injunction in part, allowing the new law to take effect.
Negotiate Your Agreement to Arbitrate
Arbitration can be a highly effective and beneficial conflict-resolution method when the process is fair and when parties have similar levels of power. When the playing field is clearly imbalanced, however, both the employer and employees should be motivated to negotiate adjustments.
As a prospective employee presented with a mandatory agreement to arbitrate, you might affirm your preference for working out conflict through open communication, negotiation, conflict mediation, or voluntary arbitration if necessary. You might then inquire about why the company has a mandatory agreement to arbitrate policy and explain that you would prefer to retain all your legal rights.
Alternatively or in addition, you might try to negotiate the terms of an agreement to arbitrate to make it fairer for you as the employee, such as asking for input in the choice of arbitrator and/or asking for a nonbinding arbitration process in which parties could decide whether to accept or reject the arbitrator’s recommendation.
What are your views on mandatory arbitration agreements?
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Build powerful negotiation skills and become a better dealmaker and leader. Download our FREE special report, Negotiation Skills: Negotiation Strategies and Negotiation Techniques to Help You Become a Better Negotiator, from the Program on Negotiation at Harvard Law School.
