From Lawyer to Employer: Season 4, Episode 7 | Arbitration Clauses at Work: The Good, The Bad & The Avoidable Mistakes

And there are certainly advantages and disadvantages, which I know we're going to talk about more today. But I think this is important to keep in mind.

Dan Schwartz: Yeah, and I think for those listeners, I think our goal today is really just to help frame the issue, see if arbitration makes sense, maybe for your organization or if there are attorneys listening for a particular case, sort of a little bit of the good, the bad, the ugly, and how to avoid some common missteps.

So Emily, I think you've framed the issue pretty well, so let's just make sure we're all level set on what this is. So, what's an arbitration clause in sort of plain English?

Emily McDonough Souza: Yeah, so in plain English, starting with the basics, an arbitration clause is a promise, usually can be contained in an offer letter, in an employment agreement, maybe even in a handbook acknowledgement -that says that if there's a dispute between the organization and an employee, it gets resolved by a private decision maker called an arbitrator, not a court. So, it's like hiring a neutral umpire, essentially. There's no jury. The process is private, the arbitrator's decision is usually final. And so I like to think of arbitration more as a private court with a narrower lane.

You still present documents. You still take testimony, you make your legal arguments, but the rules of evidence are definitely more streamlined. The timelines are tighter, and most agreements also specify a particular set of rules, procedural rules, say for example, JAMS or AAA. And so the game book is largely known in advance.

So, for employees, this can mean quicker closure, less formality. For employers, it can mean more predictability, less disruption. I think it's important to point out that quicker and private doesn't automatically mean better for every single employer or every single type of claim that we're dealing with.

Dan Schwartz: Yeah, that's a great point. I think sometimes people think, oh, I've just put in arbitration clauses and that'll solve it, and really don't understand what happens afterwards, right? The, if you do get a claim, what does that look like? What is an arbitration before AAA or JAMS actually look like? So maybe let's think about the good right now to keep on that aspect.

What are the positives? Why do employers adopt these arbitration clauses in the first place?

Emily McDonough Souza: So, I think that there are three big reasons, Dan. So, the first, as previously mentioned, is speed and efficiency. Arbitration often moves faster than court, and this can reduce disruption and management time spent in litigation.

So, to unpack this a little bit more, with a concrete example, in busy jurisdictions, employment cases can sit on court dockets easily for 18 to 24 months before it reaches trial, sometimes more. On the other hand, a well run arbitration can land a hearing within six to nine months, especially if your arbitration clause caps discovery and sets default deadlines.

So that time savings reduces things like internal witness prep, executive distraction, and the level and the, and the sprawl of e-discovery. Now, the second reason that I think it lands arbitration clauses in the pro column is it affords employers more privacy. So in other words, the hearing isn't public, the filings aren't on a public court docket, and this of course can limit publicity, protect perhaps some sensitive information that the employer doesn't want being out there for the public to see. And you know, as I'm sure employers listening to this know very well, even if the merits of a claim that you are defending against are in fact defensible, you know, you have to think about the reputational cost of public filings, which can be significant. So, arbitration just really narrows the audience, which can be important for safeguarding this type of information.

And then, uh, the last thing that I think is worth highlighting in terms of why employers often adopt arbitration clauses is that instead of a jury, you're getting a legally trained arbitrator who focuses on the law and the facts. In other words, you are getting more predictability with this type of clause.

So, selecting an arbitrator with employment law expertise often yields tighter rulings on threshold issues like enforceability of restrictive covenants, for example. So, you just trade the variability of a jury for a subject matter decision maker who sees these disputes repeatedly and consistently.

Dan Schwartz: Yeah, I think that's a great point you, you raised on the last, you're really hiring, I, I think as you said, an umpire and you're not hiring someone who's gonna decide things necessarily in your favor, but someone who's truly gonna be neutral. Right?

Emily McDonough Souza: Yeah. Those other levers are harder to pull consistently when you're in court, but it's just easier when you have the arbitration clause.

Dan Schwartz: Yeah, and I think employers probably also value at least a little more consistency. You know, if you repeatedly use a certain forum like JAMS or AAA, you might understand the procedures a little better, and you're not dealing with a variety of different proceedings you might get in state court or federal court or even the administrative hearings as well.

Um, alright, so those are the pros that we can put in one column, but there are some trade-offs. Right? What should employers think about before just jumping into an arbitration clause?

Emily McDonough Souza: Yeah, so I think that, first off, it's important to remember that cost isn't always lower in arbitration setting. So depending on the language that you use in your clause and the arbitration provider's rules, the employer may shoulder significant filing and arbitrator fees.

And this, which we will speak about in a little bit more in a, in a bit. This often happens as a fairness measure. So, in a single plaintiff case, that might be more manageable in terms of fees and costs, but in a coordinated wave of similar claims from multiple employees, these fees start multiplying quickly.

And so, the speed advantage can really invert into a cost challenge even in the arbitration tribunal. So, I think it's also worth mentioning with regard to costs that because appeal is so limited, you as the employer may choose to front load your best work earlier on. And so we're talking about intensive case, early case assessment, targeted fact development, careful arbitrator selection, and that might in fact shift the bulk of spending on legal costs to earlier on in the lifecycle then might otherwise be the case in a court of law, if that makes sense.

Dan Schwartz: Yeah, it is. I think the, the cost factor I think a lot of people often think arbitration is inherently cheaper, but that's not necessarily the case because you might be paying the arbitrator's fees, particularly in JAMS and AAA, which have that built into the employment law rules. So, I think, before employers jump in, you really need to understand, hey, if, if cases go a little sideways, what is that cost going to look like? Because often the employers have to shoulder that cost, and often it's upfront the arbitrators and the, the associations ask for essentially retainers upfront on that.

So that's, uh, a big one. What else should employers be thinking about. Previously, you, you did mention like you get a sort of quick decision, but I think one of the things that's often misunderstood is employers, if you don't like the decision you have sort of limited rights. Right?

Emily McDonough Souza: Exactly.

There's a limited right to appeal from an arbitrator, and so these decisions are often very hard to overturn. And if there's a bad outcome, unlike in, you know, Connecticut Superior Court, for example, you likely have to live with it.

Dan Schwartz: Yeah, it's a much higher standard to show that the arbitrator just really just didn't follow the law as well.

And where it's a judgment call, the arbitrator's really gonna be given the benefit of the, of the doubt there. So hat's a big one. I think, you know, some of the other things we were talking about beforehand is, I think there are also some carve outs that employers should be aware. So federal law now limits the forced arbitration of sexual assault and sexual harass claims.

So even a universal arbitration clause isn't necessarily universal. Right?

Emily McDonough Souza: Yeah, I agree with that. That's a big one. Also, another thing, another trade off is that arbitration generally has limited motion practice and discovery. So that could either be a pro or a con, depending on which way you look at it.

So for example, if your defenses are document driven and you have like strong contemporaneous records, for example, then truncated discovery could be beneficial. But on the other hand, if your defenses rely on impeaching, their credibility of a bunch of witnesses and you need more extensive fact finding, then a constrained deposition schedule can feel really tight.

Dan Schwartz: Yeah, that's a, a good point. Now, arbitration clauses, if they're sort of buried in a document, aren't automatically enforceable. Right.

Emily McDonough Souza: That is correct. You do not want to bury it in a large document. You need to be very wary of making the terms conspicuous and making sure that the proper consent and acknowledgement has been given by the employee.

Dan Schwartz: Yeah. So let's, let's talk about those sort of, uh, as we said ugly, the, the pitfalls that sink the clauses. So, you mentioned one, the sort of bearing this, but what else is gonna sink these types of provisions or agreements?

Emily McDonough Souza: Yeah, so I definitely think that employers need to be wary of drafting, unclear or one-sided terms.

So, we're talking about fees, venue, timelines, or other rules that might feel unfair and might be challenged down the line. You risk a court finding those terms unconscionable. So, fee shifting, looking at that specifically if it looks lopsided, when a court is reviewing the language of the fee shifting, like requiring the employee to pay large filing or daily arbitrator fees, then that's going to invite such challenges.

But a fee allocation that mirrors court costs for the employee, with the employer covering the majority or the entirety of the arbitrator's fees. Now that's going to be more defensible down the line should it be challenged.

Dan Schwartz: What else should employers be thinking about of sort of the common pitfalls or self-inflicted wounds here?

Emily McDonough Souza: Well, I think it's important to remember that the rollout of the arbitration agreement matters just as much as the drafting of the language of the agreement. So, if you are an employer or an HR professional and you rely on electronic onboarding from new employees, then you really need clean proof that the employee saw the clause, understood it, and and agreed with it.

This is what we were referring to before, that you don't want it to be buried in a stack of documents, onboarding documents that you're handing all to a, a new employee. You want dated acknowledgements. You want bold headings, conspicuous disclosures, and version control. So, this will go a long way toward demonstrating voluntary knowing consent should the agreement later be challenged.

I think another trap to highlight for employers is when the arbitration clause itself is silent on potential class actions or collective actions. So if you want to avoid class or collective proceedings, and that has to be clearly and lawfully addressed in the language that you use, that should be remembered as well.

Dan Schwartz: Yeah, I think employers like to rely on class action waivers as sort of a benefit. But the downside of that, I think you highlighted before and it's worth mentioning, is hey, so instead of one, one claim, now you might be dealing with a hundred and the fees and the proceedings of that can add up quickly. So, be careful what you wish. You might get it with respect to the class action. So something else for employers to think about.

You know, we were talking beforehand about a, a reset second circuit case, so I thought I'd highlight that as well. And this is an interesting case that came out just a, a couple of weeks ago from the Second Circuit, the Silva versus Schmidt baking distribution for those who like looking up those things and it was decided in December of 2025 and basically that case involved two commercial truck drivers who they worked as W2 employees for a staffing agency and they basically delivered baked goods for a distribution company. You know the bread that you get at your grocery store and after several months the company required the drivers to create their own corporations and sign distributor agreements as presidents of these new companies. So instead of them being employees, they would be their own corporations. And the agreements required mandatory arbitration, uh, and stated the drivers were not employees, they were independent contractors instead.

But I think as the court later found the driver's daily work didn't change. So, the drivers filed a proposed class action in Connecticut State Court. It was moved to federal court, and the employer initially requested that the dispute be sent to arbitration under the Federal Arbitration Act because the district court in Connecticut found the argument made by the company was these distributor agreements did not count as contracts of employment, so they were exempt from arbitration. So the drivers appealed this decision. So on appeal, the Second Circuit closely examined the wording of the law and it relied on this case new Prime versus Olivieri. So in that case, the Supreme Court decided that contracts of employment under the FAA include any agreement for someone to perform work. Doesn't matter if someone's a employee or an independent contractor. And what really mattered was the actual nature of the relationship and the court here found that the corporations that were set up by the drivers were simply tools created under the company's instructions. And so the court ruled that if employers could force employees to form corporations as the conditions of employment, it would really go against the purpose of the section one exemption and the goal of protecting transportation workers from being required to resolve disputes through mandatory arbitration.

So, I think the takeaway from that is contracts that are signed by transportation workers through their own companies, even when the working relationship is similar to employment, will likely be considered contracts of employment. So really important case to look at not only what the agreements say, but how they are implemented in action. So, alright, so that was a just detour into a case.

So let's talk about some practical decisions before we, uh, we wrap up. So suppose an HR leader is considering arbitration, what should they decide upfront, Emily?

Emily McDonough Souza: Well, I would first start with the overall scope. So we're talking about deciding which claims are are to be covered, which are out, and being realistic and making sure that any carve outs required by law are clearly stated.

And next, I would, as the HR leader, I would decide how I would choose your rules and forum. So I would opt for a reputable provider and then attach or clearly incorporate the governing rules. Following that, I would decide how costs are to be handled. You need to specify a fair fee structure as we previously touched upon, including what the employer itself will cover.

You also should consider a mutuality clause so that the arbitration provision might apply both ways. Something to keep in mind. And then as previously mentioned, also you want to address any class or collective actions explicitly and lawfully in the provision. So this should include a clear delegation clause if you want the arbitrator, not a court to decide gateway issues, for example, and to make that unmistakable.

Just clarity, clarity, clarity is so important in these types of of clauses. And finally, I do think it's important to consider, perhaps including an optout window. So what I'm referring to by this is giving employees a brief, meaningful optout, maybe something like 15 to 30 days, and that can strengthen enforceability down the line if it's challenge and show voluntariness.

Dan Schwartz: Yeah, that's a good point. You know, I think out of the box clauses can be helpful as a start, but you really gotta tailor it to your particular employer, your situation, and your employees, right? If you're making your sort of frontline people who work 20 hours a week, uh, making minimum wage. Do you need arbitration clauses to the same extent you might want them for your senior executives as well. So shouldn't necessarily be a one size fits all here. Right?

Emily McDonough Souza: Yeah, I totally agree. It can be a valuable tool, but it's not the default setting.

Dan Schwartz: Yeah. All right. Any other final thoughts before we wrap up here?

Emily McDonough Souza: I think what you just said, like think carefully about the fit of an arbitration clause for your organization, for the specific employees that you're, that you are considering them for draft with clarity and fairness, roll it out with discipline. I do think that overall the biggest risks here are avoidable with good planning.

Dan Schwartz: That's a great point, Emily, and probably a good one to close out on. Emily, thanks for joining us.

Emily McDonough Souza: Thanks for having me, Dan.

Dan Schwartz: And thanks to all of you again for listening to another episode of From Lawyer to Employer. If you like this podcast, feel free to share it with others and give us a rating anywhere where you listen to your podcast, whether it's Apple Podcast or Spotify.

And if you have any suggestions for an upcoming episode or just some feedback, you can always email me at dSchwartz@goodwin.com. We will have another episode coming up soon. But until next time, stay informed and keep your arbitration clauses on the up and up. Take care.

Host: Thank you for joining us on this episode of From Lawyer to Employer a Shipman podcast.

This podcast is produced and copyrighted by Shipman & Goodwin, LLP. All rights reserved. The contents of this communication are intended for informational purposes only and are not intended or should not be construed as legal advice. This may be deemed advertising under certain state laws. Subscribe to our podcast on Spotify, apple Podcast, or wherever you listen.

We hope you'll join us again.