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Arbitration Agreements

2025-11-05 10:30

When you signed your employment paperwork, you probably encountered an arbitration agreement buried in the stack of documents. Many employees sign these agreements without fully understanding what they’re giving up: the right to sue their employer in court.

Arbitration agreements are becoming increasingly common in Texas employment contracts. Under these agreements, if you have a legal dispute with your employer—discrimination, harassment, unpaid wages, wrongful termination—you must resolve it through private arbitration rather than filing a lawsuit.

Thanks to the Federal Arbitration Act (FAA), these agreements are strongly favored by courts and very difficult to avoid. This guide explains what arbitration agreements cover, how they’re enforced in Texas, the pros and cons of arbitration versus litigation, and limited defenses available to challenge unconscionable agreements.

What Is an Employment Arbitration Agreement?

An employment arbitration agreement is a contract requiring you to resolve employment disputes through binding arbitration rather than court litigation.

Key characteristics:

Private process: Arbitration occurs in a private setting, not a public courtroom

Neutral arbitrator: A single arbitrator (or panel) hears evidence and makes a binding decision

Limited discovery: Less extensive evidence gathering than court litigation

No jury trial: The arbitrator decides, not a jury of your peers

Limited appeals: Very narrow grounds to appeal an arbitrator’s decision

Binding decision: The arbitrator’s award is final and enforceable like a court judgment

What Claims Are Covered by Arbitration Agreements?

Most employment arbitration agreements cover virtually all employment-related claims, including:

Statutory Claims

  • Discrimination: Title VII (race, sex, religion, national origin), ADA (disability), ADEA (age)
  • Harassment: Sexual harassment, hostile work environment
  • Retaliation: Filing complaints, whistleblowing
  • Wage and hour: FLSA overtime violations, unpaid wages, minimum wage
  • Family and medical leave: FMLA violations
  • Workers’ compensation retaliation: Firing for filing workers’ comp claims

Common Law Claims

  • Breach of contract: Violations of employment agreements
  • Wrongful termination: Illegal reasons for termination
  • Defamation: False statements harming reputation
  • Intentional infliction of emotional distress: Extreme and outrageous conduct

Typical Agreement Language

Example: “Employee agrees that any and all disputes, claims, or controversies arising out of or relating to Employee’s employment or termination of employment shall be resolved exclusively through final and binding arbitration.”

This broad language covers almost every conceivable employment dispute.

The Federal Arbitration Act: Why Arbitration Agreements Are So Enforceable

The Federal Arbitration Act (FAA) is a federal law strongly favoring arbitration. The FAA applies to most employment arbitration agreements and makes them very difficult to avoid.

Key FAA Principles

Federal policy favoring arbitration: Courts must enforce arbitration agreements according to their terms

Preemption of state law: The FAA overrides most state laws that would invalidate arbitration agreements

Limited judicial review: Courts cannot overturn arbitration decisions except for narrow reasons (fraud, corruption, exceeding authority)

Severability: If part of the arbitration agreement is invalid, courts enforce the rest

Supreme Court Precedent

The U.S. Supreme Court has repeatedly upheld mandatory arbitration agreements in employment:

  • Epic Systems Corp. v. Lewis (2018): Upheld class action waivers in arbitration agreements
  • Circuit City Stores, Inc. v. Adams (2001): FAA applies to most employment contracts

Practical impact: Unless you can show the arbitration agreement is unconscionable or procured by fraud, courts will enforce it.

Pros and Cons of Arbitration vs. Court Litigation

Arbitration has both advantages and disadvantages compared to filing a lawsuit:

Advantages of Arbitration

Faster resolution: Arbitration typically takes 6-12 months vs. 2-4 years for litigation

Lower costs: Less discovery and shorter proceedings mean lower attorney’s fees

Privacy: Proceedings are confidential, not public record

Simplified procedure: Less formal rules of evidence and procedure

Expert arbitrators: Arbitrators often have employment law expertise

Finality: Limited appeals mean disputes end more quickly

Disadvantages of Arbitration

No jury trial: You give up your constitutional right to a jury trial

Limited discovery: Harder to obtain evidence from the employer

Limited appeals: Almost impossible to appeal an unfavorable decision

Costs: You may have to pay part of the arbitrator’s fees (unlike court where taxpayers fund judges)

No class actions: Most agreements waive your right to join class action lawsuits

Employer advantage: Employers are “repeat players” who arbitrate frequently and may have relationships with arbitrators

Lower damages: Some studies show arbitration produces lower awards than jury verdicts

The “Repeat Player” Effect

Concern: Employers arbitrate many cases. You arbitrate once (if ever). Arbitrators who rule against employers might not be selected again by employers in future cases.

Evidence: Some studies suggest arbitrators rule in favor of employers more often than juries, though this is debated.

Counterpoint: Reputable arbitration organizations (AAA, JAMS) have ethics rules preventing bias, and arbitrators who consistently favor employers could lose credibility.

What to Look for in an Arbitration Agreement

Not all arbitration agreements are created equal. Review these key terms:

1. Scope of Claims Covered

Broad: “All disputes arising out of or relating to employment”

Narrow: “Disputes regarding compensation under this agreement”

What to watch for: Agreements covering “all disputes” include discrimination, harassment, wage claims, and everything else.

2. Arbitration Organization

Reputable organizations:

  • American Arbitration Association (AAA)
  • JAMS (Judicial Arbitration and Mediation Services)

Red flags:

  • Arbitration organization selected or controlled by employer
  • Unknown or unaccredited arbitrators
  • No clear rules or procedures

3. Cost Allocation

Employee-friendly: Employer pays all arbitration costs

Red flag: Employee must pay half the arbitrator’s fees (this could cost thousands and may make the agreement unconscionable)

4. Discovery Rights

Reasonable: Allows depositions, document requests, and reasonable discovery

Problematic: Severely limits discovery, making it hard to prove your case

5. Remedies Available

Employee-friendly: Arbitrator can award all remedies available in court (damages, injunctive relief, attorney’s fees)

Red flag: Limits damages or prohibits certain remedies

6. Class Action Waiver

Common provision: “Employee waives the right to participate in class or collective actions”

Impact: You cannot join with other employees in class action lawsuits

Legality: Upheld by Supreme Court in Epic Systems (2018)

7. Mutual vs. One-Sided

Mutual: Both employer and employee must arbitrate disputes

One-sided: Only employee must arbitrate; employer can still sue in court

Enforceability: One-sided agreements may be unconscionable due to lack of mutuality

Challenging an Arbitration Agreement: Limited Defenses

Courts enforce arbitration agreements under the FAA unless you can prove narrow defenses:

1. Unconscionability

An agreement is unconscionable if it’s so one-sided it “shocks the conscience.”

Procedural unconscionability: How the agreement was formed

  • Fine print in stack of hiring documents
  • No opportunity to negotiate
  • High-pressure signing environment
  • No separate signature specifically for arbitration clause

Substantive unconscionability: Unfair terms

  • Employee must pay prohibitive arbitrator costs
  • One-sided (only employee must arbitrate)
  • Severely limited discovery
  • Restricted remedies
  • Extremely short statute of limitations

Standard: You typically must show BOTH procedural and substantive unconscionability.

Example: Texas court invalidated an arbitration agreement requiring employee to pay $7,500 in arbitrator fees upfront—prohibitively expensive for most workers.

2. Lack of Mutual Assent

You didn’t actually agree to the arbitration provision:

  • Never signed the agreement
  • Agreement was added after you signed
  • Material terms were changed without your consent

3. Fraud or Duress

  • You were tricked into signing
  • You were threatened or coerced
  • Material terms were misrepresented

4. The Agreement Doesn’t Cover Your Claim

Some claims are exempt from arbitration by statute:

  • Workers’ compensation claims: Must go through workers’ comp system
  • Unemployment benefits: Must go through administrative process

Note: Most employment discrimination, harassment, and wage claims ARE subject to arbitration.

Practical Strategies for Employees

Before You Sign

1. Read the agreement carefully: Don’t sign employment paperwork without reading the arbitration clause.

2. Negotiate if possible: Ask to remove or modify the arbitration clause. Many employers won’t negotiate, but some will, especially for higher-level positions.

3. Request employee-friendly terms:

  • Employer pays all arbitration costs
  • Reasonable discovery rights
  • Mutual obligation to arbitrate
  • No class action waiver (unlikely to succeed but worth asking)

4. Consider the job offer holistically: If the arbitration agreement is one-sided but the job is otherwise excellent, you might accept it and plan to address disputes through arbitration if they arise.

After You’ve Signed

1. Understand what you agreed to: Review the arbitration agreement to know what disputes are covered.

2. Document everything: If you have an employment dispute, document evidence thoroughly. Limited discovery in arbitration makes contemporaneous documentation critical.

3. Consult an employment attorney early: If you’re experiencing discrimination, harassment, or wage violations, consult an attorney before the situation escalates. Attorneys experienced in arbitration can navigate the process effectively.

4. Don’t assume arbitration is worse: While you give up a jury trial, arbitration has advantages (speed, lower costs, privacy). An experienced employment attorney can effectively represent you in arbitration.

The Reality: Arbitration Agreements Are Here to Stay

The legal landscape strongly favors arbitration agreements:

  • Supreme Court precedent: Epic Systems and other cases uphold these agreements
  • FAA preemption: Federal law overrides most state-law challenges
  • Business trend: More employers are adopting mandatory arbitration
  • Class action waivers: Upheld by courts, preventing collective employee actions

Practical reality: Unless the agreement is extremely one-sided (unconscionable), courts will enforce it. Your best strategy is to understand what you’re agreeing to and work with an attorney experienced in employment arbitration if disputes arise.

When to Consult an Attorney

Seek legal advice:

Before signing:

  • High-level position with significant compensation
  • Agreement appears extremely one-sided
  • You have concerns about specific terms

After signing if disputes arise:

  • Discrimination or harassment
  • Unpaid wages or overtime violations
  • Wrongful termination
  • Retaliation for protected activity

An experienced employment attorney can evaluate your arbitration agreement, assess the strength of your claims, and represent you effectively in arbitration proceedings.

Related Topics

Frequently Asked Questions

Can I refuse to sign an arbitration agreement?

Yes, but the employer can refuse to hire you or withdraw the job offer. Arbitration agreements are typically a condition of employment. Some employers will negotiate, but most will not. In at-will employment states like Texas, employers can make arbitration a condition of hiring.

Does arbitration mean I can’t file an EEOC charge or TWC wage claim?

No. You can still file administrative charges with the EEOC (discrimination), TWC (wage claims), or other agencies. Arbitration agreements typically don’t waive your right to file administrative complaints. However, if you want to file a lawsuit after the agency process, you’ll likely have to arbitrate instead of going to court.

Can I get a lawyer for arbitration?

Yes. You can (and should) hire an employment attorney to represent you in arbitration. The process is similar to litigation, just in a private forum instead of court. Many attorneys have extensive arbitration experience.

Are arbitration decisions public record?

No. Arbitration proceedings and awards are typically confidential. Unlike court cases, which are public record, arbitration remains private. This can be an advantage (privacy) or disadvantage (no public accountability for employer misconduct).

Can I appeal an arbitration decision if I lose?

Appeals are extremely limited. You can only challenge an arbitration award for narrow reasons like fraud, corruption, arbitrator misconduct, or the arbitrator exceeding their authority. You cannot appeal simply because you disagree with the decision or think the arbitrator got the law wrong.

Legal Disclaimer: This article provides general information about arbitration agreements in Texas employment and should not be construed as legal advice. Arbitration law involves complex analysis of specific contract terms, applicable statutes, and case law. If you’re facing an arbitration agreement or employment dispute, consult a qualified Texas employment attorney for advice specific to your situation.

References

  • Federal Arbitration Act (FAA), 9 U.S.C. §§ 1-16
  • Epic Systems Corp. v. Lewis, 584 U.S. ___ (2018)
  • Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001)
  • American Arbitration Association (AAA) Employment Arbitration Rules