Employment and labor arbitration in Texas: what it hears, what it does not, and when an arbitration agreement is worth it

Arbitration agreements are everywhere in employment, often because someone copied one from another company’s onboarding packet. Used deliberately, arbitration can make disputes faster, more private, and more predictable. Used carelessly, it can cost more than going to court, fail when a court reviews it, or leave the company arbitrating claims it would have won quickly in front of a judge.

Good counsel should be able to handle a dispute in either forum, and should tell you early which forum actually serves you. Here is how the choice works in Texas.

Two different things called “arbitration”

Employment arbitration is created by an individual agreement, usually signed at hiring, in which the employer and employee agree to resolve legal claims, such as discrimination, wage, or contract claims, before a private arbitrator instead of a court.

Labor arbitration comes from a collective bargaining agreement between an employer and a union. It resolves grievances under the contract, most often whether discipline or discharge met the contract’s just-cause standard. The union, not the individual employee, usually controls the grievance, and courts give the arbitrator’s interpretation of the contract great deference. A collective bargaining agreement can also require arbitration of statutory discrimination claims, but only if it says so clearly and unmistakably. Labor arbitration rewards the same discipline as a good workplace investigation: notice of the rule, a fair investigation, consistent treatment, and a proportionate penalty.

Arbitration compared with court

Two points in that table drive most decisions. First, the Supreme Court held in Epic Systems that an employment arbitration agreement can require individual arbitration and waive class and collective actions. For an employer exposed to wage-and-hour claims affecting many employees, that is the single biggest benefit. Second, under the Federal Arbitration Act, a court can vacate an award only on narrow grounds, such as fraud, arbitrator misconduct, or the arbitrator exceeding their powers, and the parties cannot contract for broader review. Texas is different: under the Texas Arbitration Act, the Texas Supreme Court has allowed parties to agree to broader judicial review of legal errors. That is a reason to choose deliberately which statute governs.

What arbitration in Texas does not hear

Even a well-drafted agreement does not reach everything:

• Sexual harassment and sexual assault claims, at the employee’s choice. Since March 3, 2022, a person alleging sexual harassment or sexual assault can elect to bring the case in court despite a pre-dispute arbitration agreement or class waiver, and a court, not the arbitrator, decides whether that law applies.
• Agency charges. An arbitration agreement cannot stop an employee from filing a charge with the EEOC, the Texas Workforce Commission Civil Rights Division, or the National Labor Relations Board, and the EEOC can pursue its own enforcement action, including relief for that employee.
• Workers’ compensation benefits for subscribers. Those disputes go through the Texas Division of Workers’ Compensation’s own process. Non-subscribers are different: Texas courts have compelled arbitration of injured employees’ negligence claims against non-subscribing employers. See Texas workers’ compensation.
• Unemployment claims. Those are decided by the Texas Workforce Commission. See Texas unemployment claims.
• Sarbanes-Oxley whistleblower retaliation claims, which federal law excludes from pre-dispute arbitration.
• Many transportation workers. The Federal Arbitration Act exempts workers engaged in interstate transportation, including some drivers and loaders, which can push the question to state law.
• Anything outside the clause’s own scope, which is why the list of covered claims matters.

What an enforceable arbitration agreement needs

Texas generally enforces employment arbitration agreements, including for at-will employees who receive notice of an arbitration program and keep working. But Texas courts look hard at whether the employer’s promise is real. An employer that can change or cancel the arbitration promise whenever it likes, without notice and even for claims already known, may have made an illusory promise, and the agreement can fail. The Texas Supreme Court upheld one program because changes required notice, applied only going forward, and could not take effect for ten days. A sound agreement includes:

When arbitration is worth the cost

Arbitration is not free. Under the American Arbitration Association’s employment fee schedule, an employee’s filing fee is capped at $350, while the employer pays its own filing and case management fees and, in most cases, the arbitrator’s compensation for every hour of the case. A court charges the employer almost nothing for the judge.

Arbitration tends to make sense when:

• You have enough employees that a class or collective wage claim is a real risk, and the waiver is worth more than the fees.
• Privacy matters, because a public lawsuit would hurt your brand, your recruiting, or your relationships.
• Your industry or facts make jury verdicts unpredictable.
• You value a faster, more predictable process and a decision-maker who knows employment law.

It may not, when:

• You are a small employer that sees a claim every few years, and most of those claims would be dismissed early in court.
• You want the right to appeal a bad result.
• Many employees could file individual claims at once. Coordinated “mass arbitration,” with hundreds of individual demands, each with its own employer-paid fees, has become a pressure tactic, and providers now have special fee schedules for it.

Where to start

If you already have an arbitration agreement, have it reviewed against current Texas and federal law, especially the modification clause, the carve-outs, and the sexual harassment exception. If you do not, decide on the merits, not because another company had one. I draft and review arbitration agreements, represent employers in employment and labor arbitrations, and help them decide which forum fits their risk. See the business law practice and the workplace practice.