What is an Arbitration Agreement?

An arbitration agreement is a written agreement in which two or more parties agree to resolve certain disputes through arbitration instead of taking those disputes to court. Arbitration is a form of alternative dispute resolution (ADR) in which a neutral third party, called an arbitrator, hears the dispute and makes a decision. Arbitration agreements are commonly found in employment contracts, consumer agreements, business contracts, vendor agreements, construction contracts, and other commercial relationships. For employers and employees, an arbitration agreement can determine where and how an employment-related dispute is resolved, making it important to understand what the agreement covers before signing it. 

Table of Contents

How Does an Arbitration Agreement Work
What Does an Arbitration Agreement Mean for an Employee
Are Arbitration Agreements Legally Binding
Is an Arbitration Agreement the Same as Waiving Your Right to Sue  
What is the Difference Between Arbitration and Mediation

How Does an Arbitration Agreement Work?

An arbitration agreement establishes that certain disputes between the parties will be handled through arbitration rather than traditional litigation. For example, an employment agreement might state that certain disputes between an employer and employee must be submitted to arbitration. If a covered dispute later occurs, the parties generally follow the process outlined in their arbitration agreement. Depending on the agreement and applicable arbitration rules, that process may involve:

1. One party submitting a claim.
2. Selecting an arbitrator or arbitration panel.
3. Exchanging relevant information or evidence.
4. Participating in an arbitration hearing.
5. Receiving a decision from the arbitrator, commonly called an arbitration award.

Arbitration is generally less formal than a court trial. Discovery may be more limited, evidentiary rules may be more flexible, and proceedings occur outside the traditional court system.

What Does an Arbitration Agreement Mean for an Employee?

For an employee, signing an arbitration agreement may mean agreeing to resolve certain future workplace disputes through arbitration rather than filing those particular claims directly in court.

Depending on the language of the agreement, covered disputes could potentially include claims involving:

• Compensation
• Employment contracts
• Termination
• Workplace policies
• Certain discrimination claims
• Certain harassment claims
• Wage-and-hour disputes
• Other employment-related disagreements

The exact scope depends on the agreement and applicable law. More importantly, an employment arbitration agreement does not necessarily eliminate every government enforcement or administrative right an employee may have. The EEOC states that an arbitration agreement does not prevent an individual from filing an employment discrimination charge with the agency, and the EEOC may still investigate the charge. Federal law also creates specific protections for sexual assault and sexual harassment disputes, discussed below.

Are Arbitration Agreements Legally Binding? 

Many arbitration agreements are legally enforceable, but enforceability depends on the agreement, the dispute, and applicable federal and state law. The Federal Arbitration Act (FAA) provides that many written agreements to arbitrate disputes involving commerce are "valid, irrevocable, and enforceable," subject to legal or equitable grounds that would permit the revocation of a contract and other statutory exceptions. That does not mean every arbitration provision is automatically enforceable. Because arbitration law can vary depending on jurisdiction and circumstances, employers should have employment counsel review arbitration programs rather than relying on a generic template.

Is an Arbitration Agreement the Same as Waiving Your Right to Sue?

Not exactly, but an arbitration agreement can affect where a covered legal claim is heard. When an enforceable arbitration agreement applies to a dispute, the parties may generally be required to resolve the claim through arbitration rather than having a traditional court decide the merits of that claim. Under the Federal Arbitration Act, courts can stay certain court proceedings and compel arbitration when a dispute is subject to a valid arbitration agreement.

What is the Difference Between Arbitration and Mediation? 

The difference between arbitration and mediation is in mediation, the mediator generally does not decide who wins or loses. Instead, the mediator helps the parties attempt to reach a mutually acceptable resolution. If they cannot reach an agreement, they may generally pursue another dispute-resolution process. In arbitration, the arbitrator hears the dispute and issues a decision, making the process more similar to a court proceeding.