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Should Your Business Use Arbitration Clauses in Employment Contracts?

Justin O. Walker
Justin O. Walker

Let's explore the pros and cons of arbitration clauses for your business.

Arbitration is classed as a form of alternative dispute resolution, which can be used to avoid litigation in the case of employer-employee disputes and grievances. The arbitrator is an independent third party who is often an attorney or retired judge. During arbitration, the judgment achieved is legally binding and based on the assumption that both parties agreed to the arbitration process in the first place.

The integration of an employee arbitration agreement or arbitration clause is a common element of employment contracts, and one that can save the employer from potentially damaging and expensive litigation being brought against them by employees.

In this article, we will look at the pros and cons of employee arbitration agreements in more detail, and outline some important factors to consider when implementing employee arbitration agreements at your company.

What is an employee arbitration agreement?

An employee arbitration agreement is usually incorporated into the employment contract for workers and is part of their terms of employment.

Employers can mandate acceptance of their arbitration agreement as a condition of employment; this is known as a forced arbitration agreement. The alternative of forced arbitration is a voluntary arbitration agreement, which gives the employee the option to accept or reject the agreement according to their preferences.

Acceptance of an arbitration agreement usually means that the employee in question waives their right to sue their employer for any reason, including discrimination, breach of contract or wrongful termination, instead subjecting themselves to the remit of the arbitration process to remedy any complaints.

Once both parties have signed an arbitration agreement, the agreement is legally binding.

Advantages of arbitration for your business

Incorporating an arbitration agreement into your employee contracts provides a variety of benefits for both the employer and the employee, although the benefits of an arbitration agreement tend to favor the employer.

These are advantages of using arbitration in your employee contracts:

  • Arbitration can help your business save significant time and money, as well as generally expediting the litigation process to resolve disputes in a timely manner.
  • The results of arbitration are legally binding and not subject to an appeals process.
  • Your business can avoid trial by jury, which tends to produce a more desirable outcome, as jurors are usually more sympathetic toward employees than corporations.
  • Arbitrators are less likely to award particularly high or punitive damages to employees, even when the company is found to be in the wrong.
  • Arbitration often actually helps maintain communication and good relationships between your business and employees.
  • Assuming a confidentiality clause is included, arbitration greatly reduces the chances of bad publicity for your business in the event an arbitrator rules against your corporation 

Disadvantages of arbitration for your business

Whilst the arbitration system is largely weighted in favor of the employer rather than the employee, there are some potential disadvantages for your business.

See below for potential disadvantages of arbitration agreements for your business:

  • Arbitration being legally binding works both ways: If the employer is unhappy with the arbitrator's decision (either in nature or in the value of damages or restitution they are ordered to make), the decision cannot be appealed.
  • Arbitration usually takes a holistic approach to the dispute to deliver one comprehensive verdict, rarely reaching individual conclusions and judgments on separate elements of the dispute.
  • Arbitration is generally covered by the employer, even if the arbitrator ultimately decides in their favor, as the employer is the entity that initiated use of the arbitration framework.
  • Participation in arbitration is legally binding once both parties have agreed to it, but in rare cases, an employee may raise a legal claim against the arbitration agreement itself.
  • Even though confidentiality clauses are a common element of arbitration agreements, if the employee decides to breach this agreement, the arbitration process provides no framework to remedy this breach. Ultimately, compliance with the confidentiality aspect of the arbitration agreement relies upon the good faith of the employee, in contrast with court-mandated confidentiality agreements.

What to consider before creating an employee arbitration agreement

It is important to fully understand the implications of creating an employee arbitration agreement. There are associated pros and cons that your business must consider before making a decision.

These are factors to consider before deciding whether to include an arbitration clause in your employee contracts:

  • Even if arbitration finds in your company's favor, you will not be awarded costs to cover the arbitration process. Determine how the company will find and retain an arbitrator or arbitration service, and ensure their neutrality and fairness.
  • Assess how forced arbitration agreements may affect your ability to retain or attract employees, and whether you will be willing to negotiate the various elements of the arbitration agreement on an individual basis.
  • Establish a framework and process for discovery under the remit of your arbitration agreement.
  • Consider whether it would be in the company's best interests to integrate limitations on the awards or damages that can be awarded by arbitration, and remember that this works both ways.

When drawing up any form of employment contract that includes an arbitration clause for either new or existing employees, it is vital to ensure that the contract is both fair and legal. This will help prevent problems further down the line. We recommend speaking with your preferred employment law attorney before making a final decision. They will be able to answer your questions and ensure you are abiding by all laws.

Disclaimer: The information presented on this site is not intended to be and should not be construed as formal legal advice or the formation of an attorney-client relationship between you and Walker Law. You should contact an attorney for advice on specific legal problems. Walker Law does not seek, and this website is not intended to solicit, legal employment outside of California that would constitute the unauthorized practice of law. Walker Law does not guarantee or warrant any results or outcomes in any matter.


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Justin O. Walker
Justin O. Walker Member
Justin Walker of Walker Law is a top-tier employment law and business litigation attorney located in downtown San Diego. His knowledge, expertise and commitment to every case are what set Justin apart from the crowd.