What exactly are you agreeing to when you sign an arbitration agreement? Learn the basics of arbitration and weigh the pros and cons before signing one.
updated November 21, 2023 · 4min read
Whether you're a small business owner about to enter into an employment contract or you're an employee about to be hired for a new job, chances are good that the related legal paperwork includes an arbitration agreement in one form or another. Before you sign such an agreement, however, you should understand the potential consequences.
Arbitration is an alternative means of dispute resolution that provides the involved parties with a solution to a dispute without having to go through the courts. Rather than having your case heard before a judge, your dispute is heard by an arbitrator during an arbitration hearing, which is usually much more informal than a court hearing and is usually conducted in a conference room. The procedures involved are also less rigorous than standard court procedures.
As with a judge in a court case, the arbitrator hears the issue and decides on an outcome. Arbitrators are often retired judges or attorneys, but sometimes, within a more specialized industry, they are people with experience in that industry who have been trained in arbitration procedures.
Because arbitration agreements are particularly common within the employment context, chances are you've signed one at some point. While an arbitration agreement can be in a separate document, it is often presented as a clause within a larger contract. For example, employment contracts often contain arbitration clauses, which state that both you and your employer agree that any issues concerning the overall contract will be resolved through arbitration rather than through the courts.
Sometimes the arbitration agreement is just a few sentences. But an arbitration agreement can also contain additional conditions, such as an outline of what issues are subject to arbitration or how the arbitration will be conducted.
Most arbitration rulings are binding, meaning once the arbitrator makes a decision, you can't appeal and ask for your case to be reheard, either by another arbitrator or by the courts. However, if you're an employee who has signed an arbitration agreement with your employer and you feel you've been discriminated against, the arbitration agreement does not take away your right to go to a government agency such as the Equal Employment Opportunity Commission (EEOC). Filing a Charge of Discrimination initiates an investigation by the EEOC and, depending on the results, the agency may end up filing a lawsuit on your behalf.
There are advantages and disadvantages to signing an arbitration agreement. The advantages include the following:
There are also, however, a number of disadvantages to signing an arbitration agreement, including the following:
Employees can sometimes find themselves in a tight spot when it comes to arbitration agreements. While you technically have the choice not to sign an arbitration agreement that appears to be skewed more to your employer's benefit, the employer can simply rescind its offer of employment if you refuse to sign.
If you are asked to sign an arbitration agreement you're uncertain about, you can always ask if the employer is willing to negotiate the terms. For example, if the agreement says that your employer gets to choose the arbitrator, you can ask that you have equal say in this choice.
In many business relationships, and particularly in the employment context, arbitration agreements are fairly common, so it's important to read them carefully and understand what you are agreeing to. If you need help with an arbitration agreement, consider using an online service provider.
by Belle Wong, J.D.
Belle Wong, is a freelance writer specializing in small business, personal finance, banking, and tech/SAAS. She ...
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