What you need to know before signing an arbitration agreement

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.

by Belle Wong, J.D.
updated May 11, 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.

Glasses, pen, and binder clip on papers focusing on text "arbitration agreement"

Arbitration overview

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.

The arbitration agreement

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.

Signing or opting out of an arbitration agreement

There are advantages and disadvantages to signing an arbitration agreement. The advantages include the following:

  • The arbitration process is less costly and generally faster than going through the courts.
  • Unlike in a court case, where the contested issue is heard before a judge, in an arbitration you often have a say over who will be the arbitrator.
  • There is more privacy within the arbitration process when compared to litigation before the courts. While court records are public, arbitrations are private.

There are also, however, a number of disadvantages to signing an arbitration agreement, including the following:

  • Arbitration agreements are almost always signed at the beginning of a legal relationship, whether it's a business contract or within the context of employment. This means you must sign away your right to bring a lawsuit before you have any idea what issues might need to be resolved in the future.
  • Most arbitration decisions are final, so you cannot appeal if you are unhappy with the decision.
  • Unlike a court case, there are far fewer requirements when it comes to disclosure, or the exchange of information, between the parties in the dispute. Particularly in employment situations, this can leave employees at a disadvantage because it is often the employer who has access to more information and records.
  • By signing an arbitration agreement, employees give up their rights to have a jury hear and decide their case. There can often be an advantage to having an employment dispute heard before a jury, as jurors may be more sympathetic to the employee's plight. In an arbitration, however, it is always the arbitrator who decides the case.

Employee-employer arbitration agreements

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.

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Belle Wong, J.D.

About the Author

Belle Wong, J.D.

Belle Wong, is a freelance writer specializing in small business, personal finance, banking, and tech/SAAS. She spends h… Read more

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of the author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.