If you plan to ask your employees to sign an arbitration agreement to resolve employment disputes, it’s important that you understand how they can be used and how to ensure that they’re legally compliant. So what is an arbitration agreement for employment, exactly?

Arbitration is an alternative to resolving legal disputes through litigation. It’s an increasingly popular way for employers to resolve disputes, but it’s important that your agreement be legally enforceable. Otherwise, you may end up litigating disputes anyway, which can add to the time and expense disputes required.

Here’s what you need to know about employment arbitration agreements and how to create one with SixFifty.

What is an arbitration employment agreement?

Arbitration is a type of alternate dispute resolution. Instead of having your case heard before a judge, the case is heard before a third-party arbitrator during a hearing. Arbitrators are often attorneys or retired judges, but they can also be people from other industries who’ve undergone special training. The arbitrator will listen to the dispute and evidence available, then decide the outcome. While most results are legally binding, the process and procedures are less formal than going to court.

It’s important to note that arbitration rulings typically cannot be appealed, either in arbitration or the courts. However, it does not remove an employee’s right to go to government agencies like the Equal Employment Opportunity Commission if they feel they’ve been discriminated against.

An employment arbitration agreement typically asks employees to agree that any disputes will be resolved through arbitration. It can be a standalone document, but it’s most often part of a broader employment contract. The agreement might merely be a few sentences agreeing to resolve disputes through arbitration, or it can set out conditions as to the issues to be resolved or how arbitration should be conducted.

What is the purpose of an arbitration agreement?

The purpose of an arbitration agreement is to save time and money on going to court. Litigation can be extremely expensive, even for minor disputes. Arbitration is a faster, more cost-effective way to resolve issues. It’s also private, which is generally a draw for employers: unlike with litigation, records of the dispute will not be a matter of public record. Furthermore, the parties often have a say over who the arbitrator will be.

Are arbitration agreements good for employees?

Arbitration agreements may not be the best choice for employees, even if they tend to favor employers. First, they’re being asked to sign away their rights to bring a lawsuit before they know what kind of issues may arise during their employment. Furthermore, juries tend to be more sympathetic to employees, which is an additional drawback to arbitration: the arbitrator has the sole discretion to hear evidence and rule.

Next, because the proceedings are less formal than litigation, disclosure is often much less involved for both parties. Since employers usually have more access to information and company records, this can put employees at a significant disadvantage.

Finally, as noted above, most arbitration decisions are final. Unlike court cases, arbitration usually cannot be appealed.

Because employers have the option to rescind employment offers should employees choose not to sign the agreement, employees can feel pressured into arbitration. It’s also important to note that the way you ask employees to sign an arbitration agreement matters. For example, in Coady v. Nationwide Motor Sales Corp. (2022), the Fourth Circuit Court of Appeals considered whether employees signing an acknowledgement of receipt of the employee handbook constituted agreeing to the arbitration clause within. Ultimately, the court decided that the arbitration clause was an “illusory promise” and not enforceable. Because the signature page noted that the employer had the right to amend or abolish the handbook without notice, the arbitration agreement, handbook, and signature page did not meet the legal standards for a contract. Employers in other jurisdictions may encounter similar issues.

How to create an arbitration agreement for employment

So, how do you create an enforceable arbitration agreement for employment? First, you’ll need to research employment law in each state where employees live and work because many states have passed laws restricting or banning mandatory arbitration. This can be time-consuming and expensive, especially if you hire a lawyer to draft an enforceable, state-specific agreement from scratch.

On the other hand, you shouldn’t rely on online templates. These one-size-fits-all arbitration agreements may not be compliant with specific state and federal laws, which can leave your company open to the possibility of expensive litigation.

SixFifty has the perfect middle ground. Our Employment Agreements tools pair top-tier legal expertise with user-friendly technology, so you can automatically generate customized and compliant arbitration agreements. Simply answer questions about your company and download the generated document. No need to ask or research what an arbitration agreement for employment is—we’ll do the hard work for you.

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