Arbitration Agreements: Where Are We Now?

Arbitration agreements have long been a cornerstone of employment risk management. For employers, arbitration offers a streamlined alternative to litigation, reducing costs and exposure.

However, recent changes to employment rules and regulations have reshaped how these agreements fit into your risk mitigation strategy. California, in particular, is known for having a fast-changing employment landscape.

Keeping pace with this rate of change and protecting your business from regulatory threats must be top priorities. Find out how arbitration agreements fit into this strategy.

What Is an Arbitration Agreement?

An arbitration agreement requires employees to resolve disputes through a private arbitrator, rather than in court. These agreements typically:

• Waive the right to a jury trial
• Limit procedural complexity
• Provide faster resolution

However, the enforceability of your arbitration agreements depends on compliance with changing employment rules and regulations. Finding out that an arbitration clause is not enforceable can be incredibly challenging for your business to overcome, especially in a high-stakes legal matter.

Working with an employment law attorney will help you revise your arbitration agreements in light of the latest employment rules and regulations. Use their expertise to draft enforceable and clear agreements that protect your company’s bottom line.

The Shift Toward Greater Scrutiny

Arbitration filings are some of the most scrutinized legal matters, and the trend is continuing. In 2024, there were over 2,500 mass employment/workplace arbitration filings. Of those, only 2% were closed and awarded. Another 77% were settled, and 14% were withdrawn.

California courts have increasingly scrutinized arbitration agreements. In recent years, the focus has been on determining whether the agreements are fair and mutually protective.

An agreement can be invalidated if it is one-sided or confusing, especially from the employee’s perspective. You need to make sure that the agreements are accessible and explained to employees before they sign.

Key Legal Developments Your HR Team Should Know

Your HR team needs to know about several of the most notable legal developments and trends.

Procedural and Substantive Fairness

Courts will typically evaluate an arbitration agreement’s fairness from two different perspectives. First, the court will examine the procedural fairness, which is based on how the agreement was presented to the employee.

Additionally, the court will consider the substantive fairness of the agreement, which evaluates whether the terms are balanced.

The concept of fairness should influence how your arbitration agreements are written, structured, and presented. If the documents are fair, they are more likely to be deemed valid in court.

One-Sided Agreements Are at Risk

California courts are clamping down on arbitration agreements that tip the scales heavily in favor of employers. While these agreements are designed to protect your business, they cannot be blatantly one-sided in a way that puts employees at risk.

For example, an arbitration agreement that forces employees to arbitration while giving you the option to arbitrate or go to court could be viewed as too one-sided. The best approach is to consult with an employment law attorney so you can evaluate the fairness of your arbitration agreements.

Interaction With Other Agreements

One emerging issue is how arbitration agreements interact with other employment documents. The California Supreme Court recently addressed this issue in Fuentes v. Empire Nissan, Inc.

In this case, the plaintiff signed an arbitration agreement as part of an employment application. Later, the plaintiff signed two confidentiality agreements that were deemed “substantially identical.”

These agreements authorized the business to take legal action in the event of a breach of the agreement. The agreements prohibited the plaintiff from disclosing or using the company’s trade secrets.

California’s high court held that, if an arbitration agreement is paired with a secondary document, such as a confidentiality agreement that is ambiguous or silent, the agreement could undermine arbitration.

The court remanded the case for additional fact-finding, but its final determination could have a huge impact on how arbitration agreements are paired with other employment documents.

Federal Law Can’t Be Overlooked

If you operate in a litigious state like California, it can be easy to get caught up in the annual shuffle of new bills and legal updates. However, federal law also shapes how arbitration agreements are written and enforced. Your organization should be on the lookout for new federal laws that could override an arbitration agreement.

Partnering with an employment law attorney remains the ideal solution for staying apprised of complex workforce-related legal matters. Even if you retain in-house counsel, bringing in a law team with extensive experience in employment matters is beneficial.

Fairness Requirements Are More Important

Recent cases have revealed a trend among the courts. Judges expect arbitration agreements to provide reasonable costs for employees and adequate access to discovery.

Your agreements should also outline a pathway for full legal remedies. Agreements that impose excessive fees or limit the rights of employees are more likely to be struck down.

Practical Implications for HR

If your organization relies on arbitration agreements as part of its risk mitigation strategy, now is the time to review them. Here’s what your human resources team should be asking:

• Are the terms fair?
• Is the language clear and accessible?
• Were employees given time to review?

Outdated agreements may no longer comply with current employment rules and regulations. When promoting compliance and addressing weaknesses in your arbitration strategy, you should:

• Improve onboarding processes
• Ensure consistency across documents
• Train HR and management

A confident, well-trained team will be more capable of explaining arbitration agreements and protecting their enforceability.

The Value of Arbitration (When Done Right)

Despite increased scrutiny, arbitration remains a valuable tool for employers. Benefits include:

• Faster resolution of disputes
• Reduced litigation costs
• Greater predictability

However, these benefits only apply when your agreements are compliant and enforceable.

Partnering With Legal Counsel to Arbitrate Employment Rules and Regulations

Arbitration agreements are no longer an “automatic” solution that you can rely on without intentional effort. An employment law litigation firm will help you review your existing arbitration terms and promote enforceability. Stay informed and keep your agreements updated so you can continue to benefit from arbitration.