How-to guide: How to use arbitration agreements in employment (USA)

Introduction

This guide will assist in-house counsel, private practice lawyers, and human resources departments with drafting arbitration agreements to resolve disputes with employees. It covers both the enforceability of arbitration agreements and the key considerations when drafting such agreements.

This guide covers the following:

Overview of arbitration law
Drafting an arbitration agreement
Ensuring the arbitration agreement is enforceable
Vacatur of arbitration awards under the Federal Arbitration Act (FAA)

This guide can be read in conjunction with How-to guides: Overview of US employment law, How to draft an employment contract and How to draft the key provisions of an employee handbook.

Section 1 – Overview of arbitration law

In 2001, the US Supreme Court held that arbitration agreements in most employment contracts are enforceable (Circuit City Stores v Adams, 532 US 105 (2001)). Arbitration is now used to adjudicate virtually every type of employment dispute in the US, including wage and hour claims and employment discrimination claims.

Arbitration is a process for resolving disputes outside of the court system. The parties to an arbitration typically agree in advance to submit any future dispute between them to a neutral arbitrator chosen by them.

During an arbitration, the arbitrator will hear the parties’ evidence and then make a binding decision and award. In the employment context, arbitration agreements are used in employment contracts and collective bargaining agreements (CBAs). In general, the Federal Arbitration Act of 1925 (FAA) governs arbitration agreements in employment contracts and the Labor Management Relations Act 1947 (LMRA) governs arbitration agreements in CBAs. In both cases, the purpose of using arbitration is to resolve employment disputes more efficiently and economically than is possible through the court system.

1.1 Federal Arbitration Act

1.1.1 Arbitration agreements enforceable

Section 2 of the FAA provides that it applies to arbitration agreements that are as follows:

in writing; and
relate to ‘any maritime transaction or a contract evidencing a transaction involving commerce.’

The FAA ‘declare[s] a national policy favoring arbitration and with[draws] the power of the states to require a judicial forum for the resolution of claims which the contracting parties agree to resolve by arbitration.’ See, Southland Corp v Keating, 465 US 1, 10 (1984).

Arbitration agreements that fall within the scope of section 2 of the FAA are ‘valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.’ Therefore, where the FAA applies, it pre-empts any state laws that would otherwise invalidate arbitration agreements and requires state and federal courts to enforce arbitration agreements just like any other contract provision. See Southland Corp, 465 US at 16 , where it states, ‘In creating a substantive rule applicable in state as well as federal courts, Congress intended [the FAA] to foreclose state legislative attempts to undercut the enforceability of arbitration agreements.’

1.1.2 Employment-related arbitration agreements enforceable

Section 1 of the FAA provides that the FAA does not apply to ‘contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.’ In Circuit City Stores v Adams, the US Supreme Court held that the exclusion in section 1 applies only to employment contracts for transportation workers engaged in foreign or interstate commerce. The Court in Circuit City Stores v Adams interpreted only the exclusion in section 1 of the FAA and did not go on to hold that the FAA applies to all employment contracts. If an employment contract does not ‘evidence[] a transaction involving commerce,’ as required by section 2, then the FAA does not apply. Nevertheless, the Supreme Court has interpreted the phrase ‘involving commerce’ very broadly (see Allied-Bruce Terminix Cos v Dobson, 513 US 265, 272-81 (1995)). As a result, the FAA applies to most employment contracts and makes most employment-related arbitration agreements enforceable. The only employment contracts that are excluded from the FAA’s coverage are those involving workers who transport goods in commerce and those that do not ‘evidence[] a transaction involving commerce,’ as interpreted by the Supreme Court.

Increasingly, courts recognize that workers who don't physically move goods or people across state lines can still be classified as transportation workers exempt from mandatory arbitration under the FAA. This was evident when the Ninth Circuit Court of Appeals upheld a lower court's decision in Lopez v Aircraft Service Int’l, Inc., No. 23-55015 (July 19, 2024). The case involved a wage-and-hour lawsuit by an airline fuel technician. Citing the US Supreme Court's ruling in Southwest Airlines Co. v Saxon, 596 U.S. 450 (2022), the Ninth Circuit panel determined that the technician was a transportation worker engaged in foreign or interstate commerce and therefore not required to arbitrate their claims under the FAA.

Notably, however, even where an employment contract contains a valid arbitration agreement, the FAA does not bar the Equal Employment Opportunity Commission (EEOC) from pursuing victim-specific relief in litigation on behalf of an employee who files a timely charge of discrimination (see EEOC v Waffle House, Inc, 534 US 279 (2002)) where it was held that the EEOC was not limited to seeking injunctive relief against an employer and could pursue backpay, reinstatement, and compensatory and punitive damages under the Americans with Disabilities Act on behalf of an employee who had signed an arbitration agreement but was fired ‘because of his disability’ after he had a seizure at work).

1.1.3 Collective bargaining agreements

A collective bargaining agreement (CBA) is a contract between an employer and a union which applies to specific groups of employees. Most CBAs are governed by the National Labor Relations Act (NLRA), 29 USC section 151 et seq and commonly contain grievance and arbitration clauses. When a union agrees to arbitration, it generally gives up the right to strike over its grievance, while the employer gives up the ability to impose its own resolution of the issue on the union. Both parties give up the right to seek a judicial resolution of the dispute.

Typically, if a party to a CBA (ie, either the union or employer) has a complaint regarding an alleged violation of the CBA, the parties must first try to resolve the dispute through the grievance process outlined in the CBA. If the grievance process is exhausted and the parties cannot resolve the dispute, most CBAs allow either party to give formal notice of an intent to arbitrate. The CBA will specify the arbitration process and often incorporates, by reference, formal arbitration rules. Disputes that arise over the formation of the CBA itself are sometimes also resolved through arbitration.

1.2 Advantages of arbitration

Arbitration generally provides a faster, more cost-effective and less formal means of resolving disputes than litigation because it involves limited discovery and a hearing rather than extensive discovery and a jury trial. Additionally, disputes can be resolved more efficiently through arbitration than through litigation because the FAA severely limits judicial review of arbitration awards and the circumstances in which awards can be modified or vacated. Additional advantages of arbitration for employers include the following:

arbitration proceedings and awards are private, while court filings, hearings, and trials are typically open to the public;
arbitrators are less likely than juries to favor a sympathetic plaintiff over a large employer; and
arbitration agreements can require employees to waive the right to pursue individual or class litigation if a dispute arises. Employers therefore can avoid the costs associated with class actions.

1.3 Disadvantages of arbitration

The disadvantages of arbitration are listed below.

The limited scope of judicial review for arbitration awards can be a major disadvantage to the losing party.
In contrast to a judge who is paid by the government, the arbitrator must be compensated by one or both of the parties. Employers often must agree to pay both their share of the arbitrator’s fees and expenses and the employee’s share, regardless of the outcome of the arbitration.
Discovery is usually much more limited in arbitration than in litigation, arbitration hearings are less formal than court hearings, and evidentiary rules typically do not apply. The arguments and theories that will be relied upon at the hearing are thus not known to the opposing party, and the evidence that will be relied on has not been reviewed. The disregard for traditional evidentiary rules could result in less reliable or trustworthy evidence being presented to the arbitrator.
Although there is a common belief that arbitration is less preferable than litigation because arbitrators tend to split awards between the parties rather than deciding in favor of one side or the other, this belief is not supported by empirical data. According to one study of the awards in business-to-business arbitrations, arbitrators made decisions clearly in favor of one party in over 94.5% of the cases (see Corporate Counsel Business Journal article, ADR does not mean splitting the baby.)

Step 2 – Drafting an arbitration agreement

The following principles should be followed by organizations when drafting arbitration agreements.

2.1 Separate agreement

Arbitration agreements should be issued separately to other employment documents.

2.1.1 Keep arbitration separate from other agreements

The FAA requires arbitration agreements to be in writing, but it is best practice to ensure that an agreement to arbitrate an employment dispute is not included solely in an employee handbook. Employee handbooks typically carry disclaimers that the handbook is not a contract, so having the arbitration agreement in the ‘non-contractual’ handbook creates a risk that the agreement will be held to be unenforceable. The agreement should be set out in a separate document, even if the same language is included in the employee handbook.

It is advisable for employers to include a clause in the contract of employment requiring any disputes between the employer and employee to be submitted to arbitration. If allowed by local law, many employers opt to include a clause mandating arbitration for all dispute resolution. Best practice dictates that employees should also be asked to sign a separate arbitration agreement setting out the further detail specified at 2.2 below.

The arbitration agreement should be as follows:

written in plain, non-legal language using short paragraphs and simple sentences using a font that is easy to read; and
signed by the employee. Absent a signature or some other form of acceptance, it may be unclear whether the employee has agreed to arbitration.

Best practice dictates that the employee is given adequate time to read and review the arbitration agreement and ask questions before signing it. The document should not be presented along with a large collection of other onboarding documents and the employee should be required to sign the arbitration agreement separately from any other documents. This will minimize the possibility that an employee will claim that they did not have a chance to read the agreement, or that they didn’t understand it, or that they didn’t realize what they were signing. The document should specifically state that the employee is voluntarily signing the agreement and has had the opportunity to read and review it and ask questions before signing it.

If a signed arbitration agreement is updated through an amendment, the employee should be given notice of the amendment and should be required to sign or otherwise acknowledge receipt and acceptance of the amendment. This will eliminate potential misunderstandings as to the precise terms of the agreement that apply.

If the employee speaks English as a second language, the employee should be provided with an agreement that is translated into their first language.

However, on June 13, 2025, the California Court of Appeal issued a significant ruling in Silva v Cross Country Healthcare, Inc, 111 Cal.App.5th 1311, 334 Cal.Rptr.3d 74 (App. 2d Dist. 2025), striking down an arbitration agreement based on unconscionable terms found in a separate, simultaneously signed employment contract. The court held that because the two agreements, one covering the hiring process and the other outlining dispute resolution, were executed concurrently, they must be read together. The employment agreement contained multiple one-sided terms, including allowing the employer to seek immediate injunctive relief in court for certain claims (like confidentiality breaches) without having to post bond, while simultaneously forcing employees to pursue their claims (like Labor Code violations) exclusively in individual arbitration.

The court affirmed the trial court's finding that this structure created a one-sided, unconscionable framework that overwhelmingly favored the employer. Specifically, the agreement exempted claims more likely to be brought by the employer from arbitration, while mandating arbitration for employee-driven claims. Because the resulting arbitration scheme was deemed unfairly one-sided, the Court of Appeal upheld the decision to render the entire Arbitration Agreement unenforceable, rather than attempting to sever or reform the offending clauses.

This ruling serves as a strong reminder for employers to carefully review all onboarding documents to ensure terms, especially those related to dispute resolution, are not unconscionable when read alongside mandatory arbitration agreements.

2.1.2 Supported by consideration

An arbitration agreement is a contract, so to be enforceable, an arbitration agreement must be supported by consideration. Typically, employment or continued employment is enough to provide consideration.

California law provides that a new employee cannot be required to sign an arbitration agreement as a condition of employment. Additional consideration may be required, such as a small payment for new employees or a promotion or pay raise for existing employees. However, pursuant to a permanent injunction in Chamber of Commerce of the USA et al v Becerra et al, No 2:19-cv-02456 (ED Cal Jan 1, 2024), the law is inapplicable in arbitration agreements covered by the FAA.

2.2 Terms and conditions

The arbitration agreement should include terms and conditions covering the matters referred to below.

2.2.1 Consider pre-arbitration mediation

In the employment contract employers should consider including a requirement that the parties engage in at least one day of mediation or other specified internal dispute resolution process before calling for the implementation of the arbitration agreement. This is because the parties may be able to resolve the dispute without the added expense of arbitration.

2.2.2 Claims that will be arbitrated

It is good practice for the arbitration agreement to state in plain language that the employee waives their right:

to file a civil action in a state or federal court; and
to a jury trial to resolve any dispute arising out of the employment contract.

If the employer intends to subject only certain types of claims to arbitration or wants to ensure that certain claims are covered, the agreement should specifically identify those claims. (See, eg, Doe v Princess Cruise Lines, Ltd, 657 F3d 1204 (11th Cir 2011)) where it was held that the plaintiff’s claims relating to her sexual assault while employed by the defendant did not relate to, or in any way arise out of, her employment contract and therefore were not covered by the arbitration agreement.) It is also a good idea that the agreement recognizes that under federal law, certain claims are not subject to arbitration (see section 3.1 below).

In AT&T Technologies, Inc v Communication Workers, 475 U.S. 643 (1986), the US Supreme Court held that whether a dispute is arbitrable is presumptively ‘an issue for judicial determination [u]nless the parties clearly and unmistakably provide otherwise.’ Although a court will decide whether an arbitration agreement is enforceable, the arbitrator will determine whether the underlying employment contract is valid if the contract itself is challenged. An arbitration agreement should therefore also state explicitly that any dispute regarding whether the underlying employment contract or the arbitration agreement itself is valid and enforceable and any dispute about whether a claim is arbitrable shall be decided by the arbitrator.

2.2.3 Choice of law

An arbitration agreement should state that it is governed by the FAA and any other applicable state arbitration laws are pre-empted. Arbitration clauses that require an arbitration to take place outside of the state of employment or provide for the application of the law of a state other than the state of employment may not be enforceable.

2.2.4 Consider class action waiver

The arbitration agreement should require the employee to waive their right to file or participate in a class action in state or federal court, but the employer should consider including a provision that allows the parties to agree on class arbitration to resolve any dispute that arises. For large companies, class arbitration may be much more cost-effective than participating in multiple individual arbitrations involving the same dispute.

2.2.5 Mechanism for beginning arbitration

Arbitrations are typically conducted by organizations such as the American Arbitration Association (AAA) or the Judicial Arbitration and Mediation Service (JAMS). An arbitration agreement will usually state which organization will handle the resolution of a dispute and specify the rules that will apply. The agreement should also make the rules available by attaching them to the arbitration agreement.

The mechanism for beginning arbitration depends on the organization and applicable rules specified in the arbitration agreement. Under the AAA’s Employment/Workplace: Arbitration Rules and Mediation Procedures (AAA rules), for example, the parties can jointly file a request for arbitration or one party, the claimant, can file a written notice at any AAA office of its intention to arbitrate.

If a party intends to pursue litigation after an arbitration proceeding has begun, it is advisable that the party notify the organization conducting the arbitration. A party does not, however, lose its right to arbitrate merely by initiating or participating in a court proceeding concerning the same subject matter (eg, see AAA rule 51).

2.2.6 Discovery

It is advisable that the arbitration agreement allows pre-hearing discovery and specifies the discovery that will be permitted, such as the number of depositions each side can take. Use of discovery such as depositions, interrogatories and requests for admissions should be limited as much as possible to ensure a speedy, cost-effective resolution of any dispute.

2.3 The arbitrator

The arbitration agreement should also include provisions about the individual who will carry out the arbitration, known as the arbitrator. The arbitrator’s overall goal should be to manage the arbitration proceedings to achieve a more simple, less expensive and more expeditious litigation process.

2.3.1 Organization supplying arbitrator

An arbitration agreement should clearly identify the organization that will conduct the arbitration and provide a list of potential arbitrators.

2.3.2 Costs of arbitration

It is good practice that the arbitration agreement clearly allocates the costs of the arbitration between the employer and employee. In general, the employer agrees to pay for all the costs of the proceeding, except those costs that the employee would have incurred in a civil judicial proceeding, such as attorney’s fees and filing fees.

However, in Frazier v X Corp, No. 24-1948 (2nd Sept. 2, 2025), the US Court of Appeals for the Second Circuit ruled that an employer's withholding of disputed arbitration fees during a pending arbitration does not constitute a ‘refusal to arbitrate’ under the FAA. Arising from the 2022 layoffs at X Corp. (formerly Twitter), the case centered on the company's refusal to pay certain ongoing fees required by the arbitration provider, JAMS, which led to the suspension of thousands of individual arbitration proceedings. The court held that fee disputes are procedural, ‘intra-arbitration’ matters for the arbitrator or the provider to resolve, and therefore, a federal court lacks the authority under the FAA to intervene and compel the employer to pay those fees.

The Second Circuit's decision clarifies that the FAA's purpose is limited to compelling a party to start arbitration, not to manage the procedural or financial aspects of an ongoing proceeding. This ruling offers a key takeaway for employers facing mass arbitrations: they can challenge a provider's fee allocation without the immediate risk of a court order compelling payment, even if it stalls the process. However, the court specifically did not address whether an outright termination of arbitration by the provider due to non-payment would subsequently ‘open the courthouse doors’ for the employees.

2.3.3 Selection of arbitrator

Arbitration agreements should confirm:

whether an individual arbitrator or a panel of arbitrators will conduct the arbitration; and
any specific qualifications that the arbitrator or arbitrators must possess.

Typically, the parties agree on the arbitrator or panel of arbitrators from a list provided by the organization that is assigned to handle the arbitration, but if they cannot agree then the arbitrator may be appointed by a court or the organization.

2.3.4 Duties of arbitrator

The arbitrator is usually required to issue a written decision and state that the award is final and binding, except for the limited circumstances in which an award can be set aside under the FAA (see 9 USC section 10).

The arbitration agreement should also state that the arbitrator may consider and award all forms of relief that are available in a civil action, including payment of attorneys’ fees (except those that have been waived, either in the arbitration agreement or by the parties during the arbitration). It is not good practice to require that the employee’s right to file a complaint with the EEOC or any state discrimination agency, the National Labor Relations Board (NLRB), or any other governmental agency (including claims for unemployment and workers’ compensation) is waived. Additionally, the agreement should not limit or waive any statutory remedies, (such as overtime pay that the employer failed to pay) that may be awarded.

Step 3 – Ensuring the arbitration agreement is enforceable

3.1 Claims that may not be arbitrated

3.1.1 EEOC claims

In general, unless the FAA’s mandate has been ‘overridden by a contrary congressional command,’ arbitration agreements that require the arbitration of federal statutory claims, such as Title VII claims, are enforceable. See CompuCredit Corp v Greenwood, 565 US 95, 98 (2012) (quoting Shearson/American Express, Inc v McMahon, 482 US 220, 226 (1987)).

However, as noted above, arbitration agreements do not bar the EEOC from pursuing victim-specific relief in litigation on behalf of an employee who files a timely charge of discrimination.

3.1.2 Whistleblower claims

The Sarbanes-Oxley Act, 18 USC section 1514A gives employees a civil cause of action if their employer retaliates against them for disclosing mail, wire, bank, or securities fraud. The Act provides that ‘[n]o predispute arbitration agreement shall be valid or enforceable’ if it requires arbitration of a dispute arising under section 1514A. Thus, whistleblower claims under the Sarbanes-Oxley Act are not subject to arbitration.

3.1.3 Sexual assault and sexual harassment claims

On March 3, 2022, President Biden signed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 (PL 117-90), 9 USC sections 401 and 402. As the title of the Act states, a pre-dispute agreement to arbitrate a sexual harassment or sexual assault dispute is unenforceable at the option of the person bringing the claim. The law bars any forced arbitration in disputes brought after March 3, 2022, even if the agreement was signed before that date.

3.1.4 State law claims

State law on the enforcement of arbitration agreements in the employment context vary. In some states, workers’ compensation laws require arbitration of employees’ claims.

Claims for state unemployment compensation are generally not submitted to arbitration. This is because the state compensation fund is, by operation of state law, often a party in interest in such a dispute.

3.2 Unconscionability

3.2.1 Defined

Section 2 of the FAA provides that arbitration agreements are enforceable ‘save upon such grounds as exist at law or in equity for the revocation of any contract.’ At common law, a contract was not enforceable if it was unconscionable. Therefore, even where an arbitration agreement exists and covers the dispute at issue, it will be unenforceable if it is deemed unconscionable.

Courts apply relevant state contract law to determine whether an arbitration agreement is unconscionable. Unconscionability has two components: procedural unconscionability and substantive unconscionability. Procedural unconscionability involves the manner in which the contract was formed, while substantive unconscionability involves the fairness of the contract’s terms. Some states require proof of both procedural and substantive unconscionability to invalidate an arbitration agreement, while others require proof of only procedural or substantive unconscionability.

If an arbitration agreement is deemed unconscionable, then the arbitration clause does not apply, and the employment dispute will be resolved through litigation. Whether an arbitration agreement is unconscionable is a threshold issue that is resolved by a court, not the arbitrator.

3.2.2 Procedural unconscionability: clarity and presentation

Procedural unconscionability focuses on the circumstances under which the contract was formed. Courts will consider various factors in determining whether an arbitration agreement is procedurally unconscionable, such as:

whether the employee had a meaningful choice;
the disparity of bargaining power between the employer and employee;
the education level of the employee;
whether the employee was provided with the specific terms of the agreement;
whether the employee had the opportunity to review the agreement and ask questions; and
whether the material terms were clear.

3.2.3 Substantive unconscionability: unconscionable terms

Substantive unconscionability focuses on the fairness of the agreement’s terms, and, in particular, whether they unfairly favor the employer. Employees typically argue that the following terms make an arbitration agreement unconscionable:

shortened statutes of limitations;
unfair allocation of payment for the arbitrator’s costs and fees;
limits on remedies;
unfair process for selecting the arbitrator; and
making only claims by the employer subject to arbitration, while excluding an employee’s claim from arbitration.

Rather than invalidating the entire arbitration agreement, a court may simply strike the provisions that it deems unconscionable.

3.3 Recent developments

Two cases that could impact the use of arbitration agreements in employment have been decided by the US Supreme Court:

Smith v Spizzirri, No. 22-1218, decided on May 16, 2024. The US Supreme Court held that under Section 3 of the Federal Arbitration Act (FAA), when a federal court finds that a dispute is subject to arbitration and a party requests a stay of the court proceeding pending arbitration, the court must stay the litigation and may not dismiss the case simply because all claims fall under the arbitration agreement.
Bissonnette v LePage Bakeries Park St LLC, No 23-51, decided on April 12, 2024. The Supreme Court clarified that if a worker is genuinely performing transportation-related work (eg, moving goods in interstate commerce), their employer’s industry label (such as bakery, manufacturing, etc.) will not automatically disqualify the Section 1 transportation-worker exemption under the FAA. However, the court emphasized that a further factual inquiry is still required to determine whether the worker qualifies under the exemption (ie, the nature of the work and its role in interstate commerce).

Legislative and administrative developments:

On September 15, 2025, a bill was introduced in Congress titled the Forced Arbitration Injustice Repeal Act (S 2799). The bill would amend Title 9 of the US Code (which includes the FAA) to restrict pre-dispute arbitration agreements in the employment, consumer, antitrust, and civil rights contexts.
On September 17, 2025, the Securities and Exchange Commission (SEC) issued a policy statement clarifying that a mandatory arbitration provision for investor claims does not prevent an issuer’s registration statement from being accelerated and that such provisions are not inconsistent with federal securities laws under current interpretations of the FAA.

Step 4 – Vacatur of arbitration awards under the FAA

Section 11 of the FAA provides the narrow statutory grounds on which an arbitration award can be vacated, including the arbitrator’s fraud, partiality, corruption, or improper behavior or because the arbitrator exceeded or ‘improperly executed’ their powers in making the award. It reflects the ‘desire of Congress to provide not merely for any arbitration but for an impartial one.’ (See Commonwealth Coatings Corp v Cont’l Cas Co, 393 US 145, 147 (1968) where an arbitration award was vacated when a substantial business relationship existed between an arbitrator and the prevailing party and the relationship was not disclosed to the losing party.)

Additional resources:

Economic Policy Institute, ‘The growing use of mandatory arbitration’
National Academy of Arbitrators, ‘National Academy of Arbitrators Policy Statement on Employment Arbitration’
US Equal Employment Opportunity Commission, ‘Recission of Mandatory Binding Arbitration of Employment Discrimination Disputes as a Condition of Employment’