Arbitration Clause

A contractual provision requiring employees to resolve disputes with their employer through private arbitration rather than in court — waiving the right to a jury trial.

An arbitration clause is a contract provision that requires parties to resolve disputes through binding arbitration rather than litigation in a public court. In employment, arbitration agreements — often included in offer letters, employee handbooks, or standalone agreements at hire — require employees to bring any legal claims (discrimination, wrongful termination, wage theft, harassment) to a private arbitrator rather than a jury. The arbitrator's decision is typically final and binding, with very limited grounds for appeal.

Mandatory arbitration has become extremely common: surveys estimate that more than 60% of American workers are subject to mandatory arbitration clauses, particularly in service industries and large corporations. Employers favor arbitration for several reasons: arbitration proceedings are private (no public record), arbitrators tend to award lower damages than juries, arbitrators are often repeat players who have ongoing business relationships with employers, and the process is faster and cheaper to defend than full litigation.

The prohibition on class actions is one of the most significant features of most mandatory arbitration clauses. Class action waivers — upheld by the Supreme Court in Epic Systems v. Lewis (2018) — require employees to bring claims individually rather than collectively. This effectively eliminates claims for widespread low-value wage theft, where no individual employee has enough damages to justify individual arbitration but collective damages across a workforce would be substantial. The class action waiver is what makes arbitration most beneficial to employers in systematic wage-and-hour violations.

Not all employment disputes can be compelled to arbitration. The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (2022) prohibits mandatory pre-dispute arbitration clauses in cases involving sexual harassment and sexual assault — employees retain the right to bring these claims in court regardless of any signed arbitration agreement. Some states have additional restrictions on arbitration of employment disputes. And for certain government agency filings — EEOC charges, OSHA complaints, NLRB unfair labor practice charges — arbitration clauses do not apply.

What You Give Up by Signing an Arbitration Clause

  • Right to a jury trial: arbitrators decide both facts and law — you cannot have a jury hear your case.
  • Public record: arbitration is private; court proceedings are public. No public accountability for the employer's conduct.
  • Class action rights: most arbitration clauses include class action waivers, requiring you to arbitrate claims individually even if many employees are affected the same way.
  • Full discovery: arbitration typically provides more limited discovery than federal court, which may make building a complex case harder.
  • Appeal rights: arbitration awards are nearly final — courts overturn arbitration decisions only in very narrow circumstances, such as fraud or evident arbitrator misconduct.
  • Repeat player disadvantage: arbitrators who handle many disputes for the same employer may have financial incentives to favor the employer over time.

When Arbitration Clauses Cannot Apply

  • Sexual harassment and assault: federal law (2022) prohibits mandatory pre-dispute arbitration for sexual harassment and assault claims — you can choose court.
  • EEOC and government agency filings: filing a charge with the EEOC, NLRB, or OSHA is not subject to arbitration agreements.
  • Unconscionability: courts will void arbitration clauses that are so one-sided or procedurally unfair as to be unconscionable under state law.
  • NLRA protected activity: arbitration cannot waive rights protected by the NLRA, including the right to file unfair labor practice charges.
  • Some state laws: California, Massachusetts, and other states have enacted restrictions on employment arbitration agreements that go beyond federal law.
  • Administrative claims: government enforcement agencies can always investigate and pursue claims regardless of private arbitration agreements.

Example

An employee signs an offer letter containing an arbitration clause with a class action waiver. Two years later, she discovers the company systematically underpaid overtime to her job classification. An attorney explains that the class action waiver means she cannot join the hundreds of similarly situated employees in a collective claim — she must arbitrate her individual claim, which covers $4,200 in damages. The economics of individual arbitration make it impractical, and the systematic violation goes unchallenged.