Lawsuits can be expensive and inconvenient, but employee litigation can be even more painful for companies, executives and managers. Employee lawsuits hamper morale and could even encourage other employees to follow with their own lawsuits. Additionally, this kind of litigation can make private company information public.

Fortunately, employers can minimize many employee lawsuits and their fallout through arbitration agreements, where a neutral arbitrator instead of a court hears the facts of the dispute and makes a binding ruling.

According to a study by Alexander Colvin of Cornell University, employers win more often in arbitration than in litigation, employee awards are less and the proceedings move much faster.

Here’s an example that is currently playing out in the courts. In 2012, a Toyota salesman lodged a class-action lawsuit against a Los Angeles car dealership, alleging that the dealership discriminated against African-American employees in promotions. The district court granted the dealership’s motion, but the salesman appealed this past May, claiming that the agreement was unconscionable (unfair, unreasonable).

Not only does the appeal indicate that the plaintiff realizes he has a better chance if his case is heard in court, but the appellate court basically said as much by questioning whether the opt-out agreement on the original employment agreement was misleading because it was phrased to imply arbitration was a benefit for the employee. The appeals court’s decision is ­pending.

As you can tell, not all arbitration agreements are created equal. In fact, courts frequently throw out agreements that judges decide are too flawed or too heavily biased in favor of employers — or if the wording is misleading, which is the issue in this Toyota case.

With that case in the news, now is a good time to consider the advantages of arbitration agreements. 

How to Create Fair Arbitration Agreements

Even if employers can find advantages for requiring employees to sign arbitration agreements, a badly written agreement can be worse than no agreement at all. Here’s what employers need to know about creating fair arbitration agreements that will stand up to challenges in court.

    • Look at your current policies. If you have arbitration policies in place, take some time to review them. If you don’t have any policies, now is a good time to consider one. Be sure to involve a wide group in the process, including human resources and outside counsel.
    • Consider court rulings and laws. For a process that was designed to avoid the judicial system, arbitration agreements frequently end up in court. Federal laws, such as the Federal Arbitration Act, and state laws also impact the scope of these agreements. Companies need to understand exactly what court rulings and laws impact them and the specific types of agreements they can lawfully implement.
    • Be specific and upfront. In the Toyota case, the issue is the language may have been intentionally misleading, but courts may throw out an agreement for being vague. When designing or updating arbitration agreements, talk to in-house and outside counsel to be sure that the agreements are not vague, unfair or prone to dispute. Draw attention to the agreements and don’t hide them deep in the employee handbook.


  • Consider scope. Employers should carefully consider the issues that will be decided by arbitration. Some write broad arbitration agreements that require all disputes to be arbitrated, while others limit arbitration to termination or other serious matters. If you do implement mandatory arbitration, be sure to include a class-action waiver provision, which will require all claims to be made on an individual basis.
  • Be fair. Provide employees with a say in choosing the arbitrator and don’t make it the employer’s choice alone. Also, many states require employers not to make the costs of arbitration too high. In practice, this often means the employer picks up the tab for the arbitration.

Companies shouldn’t view arbitration as a way to limit the rights of employees. Instead, employers should think about the process as a way to settle disputes without a lengthy court process.

With the right attitude and agreements in place, both sides can benefit from the process rather than dragging matters through a judicial system that may take years to resolve a dispute.

About the Author

Richard D. Alaniz is senior partner at Alaniz Schraeder Linker Farris Mayes, L.L.P., a national labor and employment firm. Alaniz has been involved in labor and employment law for more than 30 years, including stints with the U.S. Department of Labor and the National Labor Relations Board. He can be reached at 281-833-2200 or