Arbitration Agreement

What Is an Arbitration Agreement?

An arbitration agreement is a contract between an employer and employee in which both parties agree to resolve employment-related disputes through binding arbitration rather than through the court system. In California, employment arbitration agreements are subject to significant legal requirements and scrutiny to ensure they are fair and enforceable.

When properly drafted and implemented, arbitration agreements can provide a faster, more private, and potentially less costly method of resolving employment disputes.

How Employment Arbitration Works

The Arbitration Process

Stage	Description
Dispute arises	Employee raises claim (wage dispute, discrimination, etc.)
Demand filed	Party files arbitration demand with arbitration provider
Arbitrator selection	Parties select neutral arbitrator (often from panel)
Discovery	Limited document and witness exchanges
Hearing	Presentation of evidence and testimony
Decision	Arbitrator issues binding written award
Enforcement	Award can be confirmed by court if needed

Arbitration vs. Litigation

Factor	Arbitration	Court Litigation
Decision-maker	Private arbitrator	Judge or jury
Privacy	Generally confidential	Public record
Discovery	Limited	Extensive
Timeline	Typically 6-12 months	Often 2-4 years
Appeal rights	Very limited	Full appellate review
Costs	Split or employer-paid	Filing fees only for employee
Formality	Less formal	Formal rules of procedure
Class actions	Often waived	Available

California Requirements for Enforceable Agreements

California courts apply heightened scrutiny to employment arbitration agreements. To be enforceable, agreements must meet these requirements:

Essential Elements

Mutual Obligation Both employer and employee must be bound to arbitrate:

• Employer cannot reserve right to go to court
• Same claims covered for both parties
• Cannot be one-sided

Adequate Discovery Agreement must allow sufficient discovery:

• Depositions must be available
• Document requests permitted
• Adequate for employee to vindicate claims

Written Decision Arbitrator must issue written award:

• Includes essential findings
• Supports meaningful judicial review
• Explains reasoning

All Remedies Available Employee must have access to same remedies as in court:

• Back pay
• Front pay
• Compensatory damages
• Punitive damages (where available)
• Attorneys' fees
• Injunctive relief

Employer Pays Costs Employer must pay arbitration costs beyond court filing fees:

• Arbitrator fees
• Administrative fees
• Hearing room costs
• Transcript costs (if required)

Employee responsible only for:

• What they would pay in court (filing fees)
• Their own attorney fees (unless fee-shifting applies)

Prohibited Provisions

These provisions make agreements unenforceable in California:

Prohibited Term	Why Unenforceable
Fee-splitting (arbitrator costs)	Creates cost barrier
Shortened statute of limitations	Limits employee rights
Limited discovery	Prevents claim development
No written decision	Prevents judicial review
Limited remedies	Denies full recovery
Confidentiality of result	May be unconscionable
Waiver of representative actions (certain claims)	PAGA representative claims cannot be waived

Consideration Requirements

The agreement must be supported by adequate consideration:

Valid Consideration	Insufficient Consideration
Continued employment (for existing employees)	Promise to consider for employment
New employment	Illusory promises
Additional compensation	One-sided agreements
Mutual arbitration promises	Vague future benefits

AB 51 and Mandatory Arbitration

What AB 51 Provides

California's AB 51 (Labor Code Section 432.6) restricts mandatory arbitration agreements:

• Prohibits requiring arbitration as condition of employment
• Applies to employment and FEHA claims
• Effective January 1, 2020

Current Legal Status

AB 51 has faced legal challenges:

Development	Status
Ninth Circuit ruling (2023)	FAA preempts AB 51 for agreements already formed
Practical impact	Voluntary agreements still enforceable
Enforcement	Injunction prevents criminal/civil enforcement
Best practice	Make agreements clearly voluntary

Voluntary Agreement Best Practices

To maximize enforceability:

1. Provide clear opt-out

   • Allow employees to decline without penalty
   • Reasonable time period to opt out
   • Document opt-out option

2. No adverse consequences

   • Employment not contingent on signing
   • No retaliation for declining
   • Same opportunities regardless of signing

3. Separate document

   • Not buried in handbook
   • Clear, conspicuous language
   • Standalone signature required

Drafting Enforceable Agreements

Required Provisions

Include these elements in your agreement:

Scope of Claims

This Agreement covers all disputes arising out of or related to
your employment, including but not limited to:
- Claims for wages, overtime, meal and rest breaks
- Claims for discrimination, harassment, or retaliation
- Claims for wrongful termination
- Claims for breach of contract
- Claims under federal, state, or local employment laws

Mutual Agreement

Both you and the Company agree to submit covered claims to
binding arbitration. This agreement applies equally to claims
brought by you against the Company and claims brought by the
Company against you.

Discovery Rights

The parties shall have the right to conduct reasonable discovery,
including depositions, interrogatories, and requests for production
of documents, adequate to fairly litigate their claims.

Remedies

The arbitrator shall have authority to award any remedy available
under applicable law, including but not limited to back pay, front
pay, compensatory damages, punitive damages, attorneys' fees, and
injunctive relief.

Cost Allocation

The Company shall pay all costs unique to arbitration, including
the arbitrator's fees and administrative costs. You shall be
responsible only for costs you would incur if bringing the claim
in court.

Written Award

The arbitrator shall issue a written decision stating the essential
findings and conclusions upon which the award is based.

Procedural Provisions

Arbitration Provider Specify a neutral arbitration organization:

• JAMS
• AAA (American Arbitration Association)
• ADR Services, Inc.

Location Arbitration should be in:

• County where employee works/worked
• Convenient location
• Not unreasonably distant

Governing Rules Reference applicable rules:

• Provider's employment arbitration rules
• California Arbitration Act
• Federal Arbitration Act

Sample Acknowledgment

ACKNOWLEDGMENT AND AGREEMENT TO ARBITRATE

I acknowledge that I have received, read, and understand this
Mutual Arbitration Agreement. I understand that:

1. I am agreeing to resolve covered disputes through binding
   arbitration rather than in court before a judge or jury.

2. I have the right to consult with an attorney before signing.

3. I have [30 days] from the date below to opt out of this
   agreement by providing written notice to Human Resources.
   My employment will not be affected by my decision.

4. If I do not opt out, this agreement will be binding on me
   and the Company.

Employee Signature: ______________________ Date: _____________
Employee Printed Name: _____________________________________

Class Action and PAGA Waivers

Class Action Waivers

Class action waivers in arbitration agreements are generally enforceable:

Aspect	Rule
Federal law	FAA supports class waivers (Epic Systems)
California	Class waivers enforceable in most cases
Effect	Employees arbitrate individually
Exception	May not apply to all claim types

PAGA Claims

California's Private Attorneys General Act (PAGA) claims receive special treatment:

Individual PAGA Claims

• Can be compelled to arbitration
• Viking River Cruises v. Moriana (2022) allows separation

Representative PAGA Claims

• More complex legal landscape
• Adolph v. Uber (2023) allows employees to pursue representative claims even after individual arbitration
• Employers cannot fully waive PAGA representative standing

Current Best Practice

• Include PAGA waiver/delegation provision
• Acknowledge potential representative claims
• Consult legal counsel on current law

Implementation Best Practices

New Hire Process

1. Provide agreement separately

   • Not embedded in other documents
   • Clear title and formatting
   • Adequate time to review

2. Explain the agreement

   • Answer questions honestly
   • Suggest attorney review if requested
   • No pressure tactics

3. Document voluntary signing

   • Signed acknowledgment
   • Opt-out option documented
   • Copy provided to employee

Existing Employees

When implementing for current workforce:

Step	Action
1	Draft compliant agreement
2	Communicate clearly to employees
3	Allow adequate review time
4	Provide opt-out period
5	Document all signatures
6	Maintain records

Record Keeping

Maintain:

• Signed original agreements
• Opt-out forms received
• Communication records
• Updates and amendments
• Training materials

Common Mistakes to Avoid

Drafting Errors

Mistake	Problem	Solution
One-sided arbitration	Unconscionable	Make mutual
Cost-sharing	Unenforceable	Employer pays unique costs
Limited discovery	Unconscionable	Ensure adequate discovery
Shortened limitations	Unenforceable	Use statutory periods
Hidden in handbook	May not be enforceable	Separate agreement

Implementation Errors

Mistake	Problem	Solution
Mandatory signing	Violates AB 51 principles	Provide opt-out
No consideration	Unenforceable	Ensure valid consideration
Lost agreements	Can't enforce	Maintain records
Inconsistent application	Discrimination risk	Apply consistently

When Arbitration Agreements May Not Apply

Exceptions

Certain claims or situations may not be subject to arbitration:

Exception	Notes
Workers' compensation	Separate statutory system
Unemployment insurance	Administrative process
NLRA rights	Certain collective rights
Sexual harassment (new claims)	Federal law changes (Ending Forced Arbitration Act)
Sexual assault claims	Cannot be forced to arbitration

Ending Forced Arbitration Act

Federal law now restricts arbitration of:

• Sexual assault claims
• Sexual harassment claims
• Employee has option to choose court

This applies regardless of existing agreements.

Practical Considerations

When Arbitration Benefits Employers

Benefit	Description
Efficiency	Faster resolution than court
Privacy	Proceedings not public
Predictability	Experienced arbitrators
No jury	Reduces emotional verdicts
Limited appeals	Final resolution

When Arbitration May Not Be Advantageous

Situation	Consideration
Clear defense	Court may dismiss faster
Small claims	Arbitration costs may exceed exposure
Multiple employees	Handling many individual arbitrations
Bad facts	May still lose in arbitration

Cost Considerations

Cost Type	Who Pays
Arbitrator fees ($300-1,000+/hour)	Employer
Administrative fees	Employer
Hearing room	Employer
Court reporter (if used)	Employer
Employee attorney fees	Employee (unless fee-shifting)
Employee filing fee	Employee

Reviewing Your Agreements

Regular review should be part of your workplace audit process:

Annual Review Checklist

• Agreement reflects current law
• Includes all required provisions
• Excludes prohibited terms
• PAGA provisions current
• Sexual harassment exclusion included
• Voluntary nature documented
• Records properly maintained
• New hires consistently provided agreement
• Opt-out process functioning

Arbitration agreements can be valuable tools for California employers when properly drafted and implemented. Given the evolving legal landscape, regular legal review and updates to your agreements are essential.