Arbitration Agreements at Work: Scope, Carve-Outs, and Enforceability

An employment arbitration program does two things: it moves disputes out of court, and it usually removes the ability to bring them collectively. The authority for both comes from the Federal Arbitration Act, which makes written arbitration agreements involving commerce valid, irrevocable, and enforceable except on grounds existing at law or in equity for revoking any contract.

That final clause is where employment arbitration is actually litigated. The statute did not repeal contract law, and it no longer covers every claim.

What the statute secures

Three points are settled enough to plan around. A court presented with a valid agreement covering the dispute must compel arbitration. Where a party asks for a stay rather than dismissal, the case is stayed while arbitration proceeds. And class and collective action waivers in employment agreements are enforceable — the Supreme Court held in 2018 that the labor statute's protection of concerted activity does not override the arbitration statute on that point.

Two limits sit inside the statute itself. Section 1 excludes contracts of employment of seamen, railroad employees, and any other class of workers engaged in foreign or interstate commerce. The Court has read that exclusion functionally rather than by industry, so the question is what the worker actually does in the flow of goods, not who the employer is. A worker inside the exclusion is not outside arbitration entirely — a state arbitration act may still apply — but the federal statute stops doing the work.

The second limit is that the agreement must exist. Formation is governed by ordinary state contract law, and an employer that cannot produce evidence of this employee's assent loses on that ground before anything else is reached.

The sexual assault and harassment carve-out

The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act, enacted in 2022, added provisions to the arbitration statute that change the default for a defined category of disputes. At the election of the person alleging the conduct, a predispute arbitration agreement and a predispute joint-action waiver are unenforceable as to a case filing a sexual assault dispute or a sexual harassment dispute. The election belongs to the claimant, not the employer.

Three features matter operationally. The choice is the claimant's, so an employer cannot compel arbitration of a covered claim over objection. Validity and applicability of the agreement to the dispute are determined by a court under federal law, not by the arbitrator, even where the agreement contains a delegation clause. And the statute applies to disputes or claims that arose or accrued on or after its enactment date, so the timing of the alleged conduct matters.

Verify before relying: Courts continue to work through how far the carve-out reaches when a complaint pleads harassment alongside unrelated claims, and whether the entire case or only the covered claims stay in court. As of mid-2026 the answer varies by court, and it is not safe to assume that adding a harassment allegation does or does not pull an entire multi-claim case out of arbitration.

A companion statute enacted the same year limits the enforceability of predispute nondisclosure and non-disparagement clauses as to sexual assault and sexual harassment disputes. Separation-agreement templates written before 2022 frequently conflict with both statutes, and the same templates are the ones still being used.

What arbitration cannot reach

• Agency enforcement. An employee's arbitration agreement does not prevent the Equal Employment Opportunity Commission from pursuing relief in its own name, including relief specific to that employee. The Supreme Court so held in 2002.
• Access to the labor board. An agreement that would bar filing charges with the National Labor Relations Board, or that employees would reasonably read that way, invites an unfair labor practice finding independent of arbitrability.
• Department of Labor investigations. A wage-hour investigation proceeds regardless of private agreements, and the agency can seek back wages directly.
• Whistleblower and retaliation reporting. Several federal statutes restrict waiver of the right to report to a government agency or to receive an award for doing so.
• Workers' compensation and unemployment. These are statutory administrative systems, not private claims subject to a forum agreement.
• Certain representative actions. California's private attorneys general statute has produced a distinct line of decisions splitting individual from non-individual claims; that treatment continues to evolve and should be checked rather than assumed.

The challenges that actually succeed

Formation is the quiet killer. Programs rolled out by email, embedded in a handbook, or acknowledged through a portal that no longer retains logs fail more often than programs with substantively aggressive terms. Before drafting anything, confirm that the company can prove assent for a specific person hired four years ago.

State overlays and preemption

Several states have tried to restrict mandatory employment arbitration. The general pattern has been preemption: a state law that penalizes an employer for requiring an arbitration agreement as a condition of employment conflicts with the federal statute's command that such agreements be placed on equal footing with other contracts, and California's attempt to do so was held preempted by a federal appellate decision in 2023.

That does not leave state law irrelevant. Generally applicable contract defenses survive, and states apply them differently. California courts apply a set of minimum requirements for arbitration of statutory employment claims — a neutral arbitrator, adequate discovery, a written award permitting limited review, all remedies otherwise available, and no requirement that the employee bear costs unique to arbitration. Other states police the same ground through unconscionability without a named framework. A separate California statute treats an employer's failure to pay arbitration fees on time as a material breach that can return the case to court, which has become a real risk in high-volume programs.

Drafting and administering the program

• A separate signed agreement rather than a handbook clause, with the handbook expressly stating it is not a contract.
• Clear scope language listing covered claims and expressly excluding claims that cannot be arbitrated, including administrative agency charges.
• An express statement that the employee may file charges with, and participate in proceedings before, government agencies.
• A named administrator and rule set, with the employment rules identified specifically.
• Cost allocation that leaves the employee paying no more than a court filing fee, with the employer bearing arbitrator and administrative fees.
• No shortened limitations period and no limitation on remedies otherwise available by statute.
• Explicit treatment of class, collective, and consolidated proceedings, and of who decides whether those are permitted.
• A delegation provision that states clearly who decides arbitrability, and acknowledges the statutory exception for covered harassment disputes.
• A retained record of distribution and acknowledgment for every employee, retained for as long as claims can be brought.
• A litigation fallback naming the court and venue for any claim the agreement cannot reach, drafted so it does not contradict the arbitration provision.

Administration deserves as much attention as drafting. Mass filings of individual demands — thousands at once, each generating administrator fees — have made high-volume programs expensive in a way employers did not anticipate when class waivers were adopted. The forum trade-offs are compared in general commercial terms in our brief on arbitration or court, including how narrowly an arbitral award can be reviewed once issued.

Questions the desk gets

Can we require existing employees to sign, and is continued employment enough consideration?

In most states continued at-will employment is sufficient consideration for an arbitration agreement presented to a current employee, but a minority require something more, and the analysis is state contract law rather than federal arbitration law. The larger practical issue is proof of assent. Roll out through a system that records who received the document, when, and what they clicked, and keep those logs.

Should we include an opt-out?

An opt-out window is one of the strongest answers to a procedural unconscionability argument, because it undercuts the claim that the agreement was imposed without choice. The cost is that some employees will opt out, and the company must actually honor and track those elections. A program with an opt-out that nobody administered is worse than no opt-out at all.

Does an arbitration agreement stop a class action about pay practices?

A valid class and collective waiver generally requires claims to proceed individually, which is usually the point of the program. It does not stop an agency investigation of the same practices, and it does not prevent hundreds of individual demands raising the identical issue. Where the underlying practice is systemic — a rounding rule or an automatic meal deduction — the exposure survives the forum choice, as described in payroll records and wage-hour audits.

What happens to an agreement signed before the 2022 harassment statute?

The statute applies to disputes and claims that arose or accrued on or after its enactment, not to agreements signed after that date. A 2019 agreement therefore cannot compel arbitration of a covered harassment dispute arising in 2026. Employers with older programs should assume the carve-out applies going forward and review any separation-agreement confidentiality language against the companion statute.

Can the agreement cover disputes with a staffing agency's client company?

Only with careful drafting. Third parties are generally not bound by or entitled to enforce an agreement they did not sign, though doctrines such as equitable estoppel and agency sometimes permit it. Where a business uses contingent labor, the agreement should identify affiliated and client entities as intended beneficiaries by defined term. The underlying liability question is separate and is covered in joint employer liability.

What to do next

Audit before you redraft. Pull the current agreement, the acknowledgment records for three sample hires from different years, the separation-agreement template, and the handbook clause. Check whether the four documents say the same thing about forum, confidentiality, and agency access. They frequently do not.

Then decide the strategic question honestly: what is the program actually for? If the answer is avoiding class exposure on pay practices, the more durable fix is usually in the pay practices themselves, checked against Wage and Hour Division guidance and its fact sheets. If the answer is confidentiality, review the 2022 limits before assuming the clause holds. Related workforce material sits on the Employment & Workforce desk, and the reference and separation issues that often accompany these agreements are covered in employment references and defamation risk.