Mandatory Employment Arbitration Clauses: Clearing the Hurdles, Part I

Can an employer require employees to submit employment-related disputes to binding arbitration? In general, “yes”. How does an employer make that happen? If you joined The Emplawyerologist from the beginning you already know the answer: include a written arbitration clause in your employment contract. (If you are first joining us, that material is available here.) As you may have guessed however, the employer will first need to clear some hurdles. Before discussing some of those hurdles, let’s get a little background:

Where can we find the legal authority for requiring submission of any kind of dispute to binding arbitration? The Federal Arbitration Act, (FAA) originally enacted by Congress in 1925, specifically mandates that a contractual provision requiring parties to settle disputes by binding arbitration is “valid, irrevocable and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract”, and also directs federal courts to compel arbitration if a party fails or refuses to comply with a valid arbitration agreement. (To the extent that they do not conflict with the FAA, state laws governing arbitration agreements and clauses will also apply.)

Now that we have the precedent for compelling binding arbitration of disputes in general, how do we know that we can do so with employment disputes? The short answer is, because the US Supreme Court told us so in 2001 in Circuit City Stores, Inc. v Adams  532 U.S. 105 (2001)! Additionally, all the circuit courts of appeals (i.e., intermediate level federal courts) have held that federal employment statutes such as Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act (ADEA), the Americans with Disabilities Act (and by extension the Americans with Disabilities Amendments Act), and the Equal Pay Act do not prohibit employers from requiring mandatory arbitration of such claims as a condition of employment. So, if I am an employer I can require my employees to sign a contract with a mandatory binding arbitration clause, and I am good to go? Well, let’s slow down and start looking at some of those hurdles.

     First hurdle: Does the arbitration clause or agreement allow the employee(s) to effectively assert and maintain any rights s/he would have under federal statutes? For example, an arbitration clause cannot require an employee to both submit to binding arbitration and agree to fewer rights than s/he would have under Title VII or, worse, give up those rights completely. Employees must be able to obtain comparable relief to that which they could obtain through litigation. Therefore, if a federal employment statute entitles an employee to receive punitive damages or recover attorneys’ fees, s/he must be able to get that same relief via arbitration.

Do the terms provide for a neutral arbitrator, and for more than minimal discovery? While the discovery available in arbitration is often less than that in litigation,  a court will likely find undue restrictions on access to discovery of relevant information unenforceable. Similarly, arbitration provisions requiring an employee to pay either unreasonable costs, a disproportionate share of the costs or an arbitrator’s fees or expenses in order to even have access to the arbitration forum, are likely to be stricken down by a court. Why? If the arbitration provisions appear to make it harder for the employee to bring employment-related claims through arbitration than litigation, then the provisions are not an effective mechanism for him or her to address his or her federal statutory rights.

     Second hurdle: The terms must be fair to the employee. Terms contained in an arbitration clause or agreement cannot be so unduly harsh and one-sided as to favor the employer.  When the terms do not clear these first two hurdles they may be referred to as “substantively unconscionable”. What in the world does that mean? A practice, policy or contract that is unduly harsh or unfair in legalese is “unconscionable”.  A contract is substantively unconscionable when its terms are so one-sided that it unfairly favors one party and hurts the other. The arbitration clause or agreement already requires the employee to give up his or her right to a jury trial. One that also has the effect of either abridging or nullifying the employee’s ability to pursue a claim to enforce his or her federal statutory rights is about as one-sided as such an agreement can get and will not pass muster in court.

Sometimes a court can sever the “problem” provisions and enforce the rest of the agreement as written. If however, those provisions are so entwined with or permeate the agreement, a court will not do so, and instead will simply strike down the entire agreement. Why? Think of it as the difference between editing and re-writing.  If a court can sever a provision and still preserve the contract, that is minor editing and in most states, courts will have the power to do so. If the offending language is so entwined in the agreement, then the court would either have to re-write the agreement (which either exceeds its authority or is simply impracticable) or strike it down. How about some examples?

           In Ferguson v. Countrywide Credit Industries, Inc. 298 F.3d 778, (2002) the Ninth Circuit (covering CA, and most states west of Utah) found that mandatory provisions requiring employees to arbitrate claims it was most likely to bring, such as discrimination, violation of family and medical leave and disability laws, and excluding claims the employer was more likely to bring, such as intellectual property and confidentiality issues was too one-sided and thus unenforceable.  The Fourth Circuit (covering Maryland, the Virginias and Carolinas ) in Murray v. United Food and Commercial Workers International Union , 298 F.3d 297 (2002) held that an arbitration agreement requiring the parties to choose an arbitrator by striking the names of arbitrators from a list of seven and confers sole discretion to the union to select the initial seven arbitrators, was one-sided, unfair and therefore substantively unconscionable. The court struck down the agreement.  These two cases show that the arbitration clause or agreement must require both sides to arbitrate.

Join The Emplawyerologist next week, same time, same station for a continuation of this discussion on clearing the hurdles to writing enforceable mandatory arbitration clauses in employment agreements!

Disclaimer:  Content in this post is written for informational purposes only and is not intended as legal advice or to create an attorney-client relationship. Always consult with competent local employment counsel about any issues discussed on The Emplawyerologist.

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    • says

      Hi David!

      Sorry to take so long responding. Your comment somehow was filtered out as spam! You have asked a very specialized question that I am happy to help with in any way I can, though it may not be something to include on The Emplawyerologist (because I am not sure it is relevant to that many of the readers). Let me see what I can do there.

  1. Bob Small says

    State law issues also msut be considered in drafting arbitration provisions for employment contracts. For example, PA’s Wage Payment and Collection Act authorizes aggireved employess to “institute actions” to recover unpaid wages. Another provision provides that no provision of the Act may be contravened or set aside by a private agreement. It is questionable, therefore, whether an arbitration provision in an employment agreement would bar a civil suit by an employee under that Act.

    • says

      Bob, that is aboslutely true. I did mention that state laws, to the extent that they do not conflict with the FAA will also come into play. Thank you for providing readers an example of just how that can happen. It of course is not possible to cover every single state’s laws on any one subject in one post (or even 2 or 3)!Even so, this is only Part I, and I do intend to touch on other instances where mandatory arbitration will not necessarily be the employee’s sole recourse, so please c’mon back next week, and feel free to let me know your thoughts! Thanks again for your comment!

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