What an employment arbitration agreement does
An employment arbitration agreement moves covered disputes out of the public court system and into a private forum, where a neutral arbitrator (or panel) hears evidence and issues a binding award. It typically covers claims arising from the employment relationship: wage and hour disputes, discrimination and retaliation claims, wrongful termination, and breach of contract. In exchange for giving up a jury trial, both sides usually gain a faster, less formal, and confidential process with limited rights of appeal.
The agreement is generally governed by the Federal Arbitration Act (FAA), which reflects a strong federal policy favoring arbitration and preempts most state laws that would single out arbitration clauses for disfavor. Because the FAA treats an arbitration agreement like any other contract, it can be defeated by ordinary contract defenses such as fraud, duress, and unconscionability, but not by rules that target arbitration specifically.
A well-built clause does several jobs at once: it defines the scope of covered claims, names the arbitration provider and rules (for example, the American Arbitration Association Employment Rules or JAMS), allocates costs, addresses class and collective action waivers, and carves out claims that cannot or should not be arbitrated.
Drafting example
Covered Claims. Except as stated below, the Company and Employee agree to resolve by final and binding arbitration any dispute arising out of or relating to Employee’s employment or its termination [defines a broad, mutual scope]. Arbitration will be administered by the American Arbitration Association under its Employment Arbitration Rules before a single neutral arbitrator [names the provider and a neutral decision-maker]. The Company will pay all arbitration filing and arbitrator fees that exceed the amount Employee would have paid to file in court [shifts forum-specific costs, supporting enforceability]. This Agreement does not waive any claim that, by law, may not be subject to a predispute arbitration agreement, and Employee may elect to bring a claim of sexual assault or sexual harassment in court [EFAA and statutory carve-outs]. The arbitrator may award any remedy available in court and will issue a written, reasoned award [preserves remedies and review].
Every bracketed note maps to a requirement courts scrutinize. Deleting the cost-shifting sentence or the carve-out is exactly how an otherwise valid clause becomes unenforceable.
What the law says
Under the FAA, courts enforce arbitration agreements according to their terms. In Epic Systems Corp. v. Lewis (2018), the Supreme Court held that class and collective action waivers in employment arbitration agreements are enforceable and do not violate the National Labor Relations Act. That decision is why most employers pair an arbitration clause with a class waiver.
The most important recent limit is the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (EFAA), effective March 2022. It gives a person alleging sexual assault or sexual harassment the option to void a predispute arbitration agreement and proceed in court, at the claimant’s election. A modern agreement must acknowledge this carve-out rather than purport to compel arbitration of every claim.
Enforceability also turns on state unconscionability doctrine, which the FAA preserves. Courts examine both procedural unconscionability (a take-it-or-leave-it agreement of adhesion, surprise, or no time to review) and substantive unconscionability (one-sided terms). Influential state authority such as Armendariz v. Foundation Health Psychcare Services (Cal. 2000) sets minimum standards for arbitrating statutory claims: a neutral arbitrator, adequate discovery, a written award subject to limited review, all remedies available in court, and no requirement that the employee bear costs unique to arbitration.
State attempts to ban mandatory employment arbitration have largely failed under FAA preemption; for example, California’s AB 51 was held preempted in Chamber of Commerce v. Bonta (9th Cir. 2023). Consideration is also required: in many states, continued at-will employment is sufficient consideration for an arbitration agreement, but this varies by state.
Common mistakes to avoid
The most damaging errors are structural, not stylistic:
- Making the clause one-sided. Requiring the employee to arbitrate while letting the employer sue in court is a classic mark of substantive unconscionability. Keep obligations mutual.
- Shifting arbitration costs to the employee. Filing fees, arbitrator compensation, and forum fees that exceed ordinary court costs should fall on the employer.
- Omitting the EFAA carve-out. Purporting to compel arbitration of sexual harassment or assault claims can render the provision unenforceable as applied and signals bad faith.
- Stripping remedies or discovery. Limiting statutory damages, attorney’s fees, or reasonable discovery undermines the employee’s ability to vindicate rights and invites invalidation.
- Burying the agreement. Hiding the clause in a handbook, omitting a signature line, or denying time to review creates procedural unconscionability. Present it as a standalone, signed document.
- Ignoring the delegation question. Decide expressly whether the arbitrator or a court rules on arbitrability, and draft that delegation language clearly.
- Forgetting non-arbitrable claims. Administrative charges (for example, to the EEOC or NLRB), workers’ compensation, and unemployment claims typically proceed through their own channels.
When it matters most
An employment arbitration agreement matters most at the moments of highest exposure: onboarding a large workforce, integrating employees after an acquisition, and rolling out a policy change across multiple states. In each case, consistency and enforceability across jurisdictions decide whether the clause holds up when it is finally tested.
It also matters disproportionately in high-stakes disputes. A confidential forum can protect both parties’ reputations in a discrimination or trade-secret claim, and a class waiver can be decisive when a single wage-and-hour theory could otherwise aggregate thousands of plaintiffs. The value of the clause is realized years after signing, which is precisely why the drafting has to be right the first time.
Disciplined contract management
An arbitration clause is only as strong as the version you can actually produce, signed and unaltered, when a claim lands, and that is a contract management problem as much as a drafting one. A CLM platform such as Pactolane keeps every executed agreement in a searchable repository with a complete audit trail, standardizes the language through approved templates, and captures electronic signatures so consent is never in doubt. Its AI copilot, PactAI, can apply a compliance playbook and a 0-100 risk score to flag a one-sided term, a missing EFAA carve-out, or an absent cost-shifting provision before the document goes out. PactAI prepares the analysis; your counsel makes the call. Treated with that discipline, an employment arbitration agreement stops being a liability hiding in a handbook and becomes a reliable, enforceable part of your employment framework.
This is general legal information, not legal advice.
Related clauses
Frequently asked questions
Are employment arbitration agreements legal in the US?
Yes. Under the Federal Arbitration Act (FAA), employment arbitration agreements are generally enforceable, and the FAA preempts most state laws that would single them out for a ban. They can still be defeated by ordinary contract defenses such as fraud, duress, or unconscionability.
Can an employer force an employee to arbitrate a sexual harassment claim?
No, not if the employee objects. The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (effective March 2022) lets a person alleging sexual harassment or assault void a predispute arbitration agreement and proceed in court. Because the choice belongs to the claimant, modern agreements should include an explicit carve-out for these claims.
What makes an employment arbitration agreement unenforceable?
Courts most often strike agreements that are unconscionable, meaning both unfairly presented and unfairly one-sided. Common red flags include forcing only the employee to arbitrate, shifting arbitration-specific costs to the employee, stripping statutory remedies, and denying reasonable discovery. Keeping the terms mutual and cost-neutral to the employee is the strongest defense.
Does an employment arbitration agreement need separate consideration?
Like any contract, an arbitration agreement must be supported by consideration. In many states, an offer of employment or continued at-will employment is sufficient, but the rule varies by jurisdiction.
Can an employment arbitration agreement include a class action waiver?
Yes. In Epic Systems Corp. v. Lewis (2018), the Supreme Court held that class and collective action waivers in employment arbitration agreements are enforceable under the FAA. This is why most employers pair an arbitration clause with a class waiver, which can prevent aggregated wage-and-hour and similar claims.