Arbitration Agreements With Employees: Enforceable, and Worth It?

Which law governs, and why it matters

Most employee arbitration agreements in Texas are governed by the Federal Arbitration Act, which applies to a written arbitration provision in a contract evidencing a transaction involving commerce. Under 9 U.S.C. § 2, such a provision is valid, irrevocable and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. Employment with a company that buys, sells or ships across state lines, or serves out-of-state customers, nearly always qualifies. The FAA preempts state rules that single out arbitration for disfavor, which is why the question in Texas is usually ordinary contract law: was there an agreement, and is it enforceable on grounds that would apply to any contract.

Two carve-outs matter. Section 1 of the FAA excludes contracts of employment of seamen, railroad employees, and any other class of workers engaged in foreign or interstate commerce, which the courts have read to cover transportation workers who move goods across state lines. A trucking company's drivers may fall outside the FAA, leaving the agreement to the Texas Arbitration Act. And the Texas Arbitration Act, Civil Practice and Remedies Code section 171.002, does not apply to claims for workers' compensation benefits, or to claims for personal injury unless each party agreed in writing on the advice of counsel and the agreement is signed by each party and each party's attorney. Where the FAA applies, those Texas exclusions are generally displaced; where it does not, they can keep an injury claim in court.

Notice plus continued employment: how Texas forms the agreement

An employer does not need a separately negotiated contract with each employee. In In re Halliburton Co. (2002), the Texas Supreme Court held that an at-will employee who was unequivocally notified of a new dispute resolution program and continued working after its effective date had accepted the program as a matter of law. The court also held that the employer's reserved right to amend or terminate the program did not make its promise illusory, because amendments did not apply to disputes the company already knew about and termination took effect only after notice and did not reach earlier disputes. And it held that offering the program on a take-it-or-leave-it basis to an at-will employee was not, by itself, unconscionable, pointing to the program's terms: the employer paid the costs, the arbitrator was neutral, discovery was available, and all remedies the employee could get in court were preserved.

Those facts are the checklist. An arbitration program that is enforceable in Texas typically has:

• clear notice to each employee, with proof of delivery, and a stated effective date;
• a statement that continued employment after that date is acceptance;
• a limit on the employer's power to change it: no retroactive application to known disputes, and advance notice of termination;
• employer payment of the arbitrator's fees and forum costs beyond what the employee would pay to file in court;
• a neutral arbitrator chosen through a recognized provider, adequate discovery, and every remedy the law allows, including attorney's fees where a statute provides them.

Agreements that shorten statutory limitations periods, cap damages, bar fee awards the statute grants, or require the employee to split the arbitrator's bill are the ones courts find unconscionable, and a court may refuse to enforce the whole clause rather than fix it.

Class and collective action waivers

The largest financial reason employers adopt arbitration is the ability to require individual proceedings. In Epic Systems Corp. v. Lewis (2018), the United States Supreme Court held that arbitration agreements providing for individualized proceedings must be enforced under the FAA and that the National Labor Relations Act does not displace that result. A properly drafted waiver means a wage-and-hour dispute that would otherwise be a collective action on behalf of every similarly situated employee proceeds one employee at a time. Whether that is an advantage depends on the company's exposure; a business facing one large claim gains little, while a business with a workforce paid the same arguably noncompliant way gains a great deal. The general law on these clauses is covered in class action waivers in business contracts.

The sexual harassment exception

Since March 3, 2022, the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act, 9 U.S.C. § 402, provides that at the election of the person alleging conduct constituting a sexual harassment dispute or sexual assault dispute, no predispute arbitration agreement or predispute joint-action waiver is valid or enforceable with respect to a case filed under federal, tribal or state law that relates to the dispute. The court, not the arbitrator, decides whether the Act applies, regardless of any delegation clause. The Act reaches disputes that arise or accrue on or after its effective date. Its practical effect is that an employee who alleges sexual harassment can keep the entire case, often including related retaliation and discrimination claims that are part of the same dispute, in court before a jury. Employers should assume the arbitration agreement will not apply to those cases and plan accordingly.

Is it worth it? The honest trade

What the employer gains. No jury, which matters most in cases with sympathetic facts and a corporate defendant. A private proceeding with no public filings, which matters when the allegations would damage the company's reputation whether or not they are true. Individual rather than collective proceedings. A faster path to a hearing in many cases. An arbitrator who will read the documents.

What the employer gives up. Most of the cost of the forum: under the rules of the major providers and under the Halliburton reasoning, the employer pays the arbitrator's fees and administrative charges, which for a multi-day hearing are substantial. The near-absence of appeal, which cuts both ways: a bad award is hard to vacate, as explained in whether an arbitration award can be appealed or vacated. The reduced likelihood of dispositive motions, so a weak claim that a court might dismiss on summary judgment often proceeds to hearing. And a possible increase in the number of small claims, because an employee with a modest wage claim and a lawyer who knows the employer pays the forum's cost has a cheap venue.

The business case therefore depends on the company's actual claim history. A professional services firm with a small, well-paid workforce and an occasional executive dispute may do better in court. A company with hundreds of hourly employees and a wage-and-hour exposure profile usually does better with individual arbitration and a class waiver. There is no answer that fits every business, and the decision should be revisited as the workforce changes.

What the employee's lawyer will argue

• No agreement. The employee never received the notice, the acknowledgment is unsigned, the program predates the employee's hire with no later notice, or the handbook that contains the clause also says it is not a contract.
• Illusory. The employer can change or cancel the program at will, including for pending disputes, so it promised nothing.
• Unconscionable terms. Fee-splitting, a shortened limitations period, a damages cap, a distant hearing location, or a one-sided carve-out letting the company sue in court for its claims while the employee must arbitrate everything.
• Outside the FAA. The employee is a transportation worker under section 1, and the Texas Act's exclusions then apply.
• The sexual harassment statute. Any case with a harassment or assault allegation, pleaded to bring the whole dispute within the exception.
• Waiver by litigation conduct. The company answered, served discovery and set a trial date before moving to compel, and has waived the right to arbitrate.

Example

Suppose a Dallas distribution company with 180 employees adopts an arbitration program in 2024. Every employee receives an email and a paper copy announcing it, with a 30-day effective date, a statement that continued employment is acceptance, employer payment of all forum costs, a neutral arbitrator through a national provider, full remedies, and a clause that changes do not apply to known disputes. In 2026, a warehouse lead sues in state court for unpaid overtime on behalf of all warehouse staff and adds a claim that a supervisor sexually harassed her.

The overtime claim goes to individual arbitration: she had notice, she kept working, the program's terms match Halliburton, and the collective action waiver is enforceable under Epic Systems. The sexual harassment claim stays in court at her election under the 2022 federal statute, and her lawyer will argue that the retaliation allegations are part of the same dispute and belong in court too. The company ends up with two proceedings, which is a worse outcome than it planned for but a far better one than a collective action for every warehouse employee in a Dallas County courtroom.

Before rolling out or relying on a program

1. Confirm the FAA applies to the workforce, and identify any transportation workers who may fall outside it.
2. Match the terms to the Halliburton checklist: notice, acceptance by continued employment, no retroactive changes, employer-paid costs, neutral forum, full remedies.
3. Decide deliberately on a class and collective waiver, and on carve-outs for injunctive relief on trade secret and non-compete claims, which most employers want to keep in court.
4. Draft for the sexual harassment exception rather than pretending it does not exist.
5. Keep proof of delivery and acknowledgment for every employee, every version.
6. When a lawsuit arrives, move to compel arbitration first, before answering on the merits.

A litigator who has moved to compel arbitration, and resisted such motions, can tell a company whether its current program would survive the arguments above and whether, given its claim profile, it should have one at all. The same questions arise for commercial agreements, covered in whether the arbitration clause in a contract is enforceable in Texas. Tina Wysk represents employers in arbitration and in Dallas state and federal courts; see business arbitration and mediation.