Mandatory Arbitration in Employment Agreements: What You're Giving Up

Buried somewhere in your employment agreement — or in a separate arbitration agreement you sign at onboarding — there's likely a clause requiring that disputes between you and your employer be resolved through private arbitration rather than in court. This clause deserves more attention than it typically gets. Here's what you're agreeing to and what it means in practice.

What Mandatory Arbitration Means

Arbitration is a private dispute resolution process. Instead of filing a lawsuit in court, both parties present their case to an arbitrator (or panel of arbitrators) — typically a private attorney or former judge affiliated with an arbitration service like JAMS or the American Arbitration Association (AAA). The arbitrator's decision is binding and generally not subject to meaningful appeal.

When you agree to mandatory arbitration, you're waiving several things:

• Your right to a jury trial: Arbitration decisions are made by a neutral arbitrator, not a jury of your peers.
• Broad discovery: Court litigation allows extensive document discovery and depositions. Arbitration typically involves more limited discovery, which can disadvantage employees trying to obtain evidence held by the employer.
• Public proceedings: Court filings are generally public records. Arbitration is private and typically confidential. This affects whether your claims and the employer's conduct become publicly known.
• Meaningful appellate review: Federal court arbitration decisions are nearly impossible to appeal except in narrow circumstances (fraud, corruption, arbitrator misconduct). If the arbitrator gets it wrong, you generally can't appeal.

The Class Action Waiver

Paired with mandatory arbitration in almost every employer arbitration clause is a class action waiver. You agree that you will not participate in, lead, or join any class action or collective action against the employer.

The class action waiver is often more practically significant than the arbitration requirement itself. Many individual claims against employers — particularly wage and hour violations, misclassification claims, and systemic discrimination patterns — are only economically viable as class or collective actions. An individual wage claim for a few thousand dollars is unlikely to attract an attorney on contingency. A class action involving thousands of similarly-situated employees becomes a viable case.

The Supreme Court's decision in Epic Systems Corp. v. Lewis (2018) upheld the enforceability of class action waivers in employment agreements under the Federal Arbitration Act. For most private-sector employees outside of specific exempt categories, class action waivers are enforceable.

Who Pays for Arbitration

Arbitration is expensive. JAMS and AAA charge filing fees and arbitrator fees that can run into the thousands or tens of thousands of dollars for a multi-day hearing. Who pays for these costs matters enormously.

Both JAMS and AAA have employment arbitration rules that generally require employers to pay the arbitration costs — not the employee. If your arbitration clause specifies JAMS or AAA rules for employment disputes, the cost allocation provision in those rules typically protects employees from bearing the cost of arbitration itself.

If your arbitration clause specifies different rules — or if it's silent on cost allocation — the employer-pays default may not apply. Clauses that require employees to share arbitration costs may effectively deny access to arbitration for low and moderate-value claims.

Sexual Harassment Exemption Under Federal Law

In March 2022, Congress passed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act. This federal law creates a significant exception to mandatory arbitration: claims of sexual harassment or sexual assault may not be compelled to arbitration under a pre-dispute arbitration agreement, regardless of what the employment agreement says.

In plain terms: even if you signed a mandatory arbitration agreement, you can file sexual harassment claims in court. The employee has the choice whether to use arbitration or court; the employer cannot force arbitration on these claims.

This is a significant departure from the prior landscape. The law applies to claims that arise after the Act's effective date — March 3, 2022. Similar proposals to extend the exception to other categories of discrimination claims (race, disability) have been introduced but not yet enacted as of early 2026.

State Law Complications

A few states have attempted to restrict mandatory arbitration in employment contexts:

California: California has had a complicated history with employment arbitration restrictions. AB 51 (2019) attempted to prohibit employers from requiring arbitration as a condition of employment, but federal courts largely blocked its enforcement as preempted by the Federal Arbitration Act. The law's applicability to employment arbitration agreements remains limited in California.

Other states: Several states have passed laws restricting mandatory arbitration of sexual harassment and discrimination claims, some of which have faced preemption challenges. The landscape is evolving.

The interaction between state law and the Federal Arbitration Act means that many state-level restrictions on employment arbitration have limited effect. The 2022 federal law (covering sexual harassment and assault) is the most significant current protection.

What to Look For

When reviewing an arbitration clause:

• Which rules govern? JAMS, AAA, or something else? JAMS and AAA have published employment arbitration rules that include employee cost protections.
• Who pays? Is there an explicit cost allocation provision?
• Class action waiver: Is it present? Mutual or one-sided?
• Carve-outs: Are any categories of claims excluded from arbitration (e.g., workers' compensation, unemployment, small claims)?
• Location: Where must arbitration take place? A requirement to arbitrate in a distant city can be a practical barrier.
• Confidentiality: Are arbitration proceedings confidential? What about the outcome?

The Bottom Line

Mandatory arbitration clauses fundamentally change how disputes between you and your employer are resolved — typically in ways that favor the employer. Before signing an employment agreement with an arbitration clause, paste it into dott.legal for a free AI risk analysis that identifies the class action waiver scope, cost allocation terms, and any unusual restrictions. For high-stakes situations involving potential employment claims, attorney-validated review is $349 with 24-hour turnaround.