What is an arbitration clause?

Arbitration is a form of alternative dispute resolution that allows parties to settle disputes outside of the courts. The parties bring their case before a third party who then gives his legally-binding decision. Arbitration generally results in reduced litigation expenses, swifter resolution of disputes, and less intrusive investigation.

However, many employers include arbitration clauses into employment contracts that require employees to agree to settle any claims by arbitration. Employees are now often required to sign these arbitration agreements before they can start their jobs. This is called “forced arbitration.” An employee must either agree to settle his disputes through arbitration or not take the job.

For example, an employee who has not been paid his required overtime may wish to sue his employer to recover the unpaid wages. However, if he has signed an arbitration clause, he cannot bring his claim to a court. He must bring it before an arbitrator.

Generally, clauses that are unconscionable—that is, the burden on one side is very extreme and harsh—are not enforceable. However, in Texas, requiring an employee to arbitrate an employment dispute is not unconscionable. So, an arbitration clause will still be enforced even if the parties did not negotiate its terms. But, an arbitration clause may be considered unconscionable if the employee’s share of arbitration fees is prohibitively expensive.

Many federal statutory claims, such as age discrimination under the ADEA, are also subject to forced arbitration clauses. The Federal Arbitration Act provides that any arbitration clause is presumably valid, irrevocable, and enforceable. The only exclusion is limited only to employees engaged in the transportation industry.

Scope of Arbitration Clauses

Disputes often arise as to what claims must be submitted to arbitration under a broadly-worded arbitration clause. For example, an arbitration clause written to cover any dispute about the validity of the agreement, the enforcement of its financial terms, or any other disputes was interpreted to include an employee’s Title VII discrimination claim. Thus, broadly-worded arbitration clauses can include certain claims not specifically listed in the clause.

However, this may not be the case where there is a relationship between the parties that is separate from the employer-employee relationship. For example, if an employee is also a client or customer of the employer, he may not be required to arbitrate disputes arising from his relationship as a customer.