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Arbitration Clauses in Employee Manuals May Not be Binding



By Max Nuyen

Courts in the past were hostile to employment arbitration agreements, especially in California. For the last ten years, however, the tide has turned after a series of Supreme Court decisions. Courts have slowly and reluctantly embraced arbitration agreements, and now routinely enforce them. Today, an employer may expect an arbitration agreement is a ticket to get out of prolonged litigation.

Despite the rosy future for employment arbitration agreements, things do not always turn out favorably for the employer, as a recent case demonstrates. In order for an arbitration agreement to be enforceable, it must first meet certain requirements, one of which is the agreement must be a valid contract.

An employee began his employment with a child care provider in 2006, at which time he received a copy of the Employee Handbook and signed an acknowledgment of receipt.

Within the Employee Handbook was a provision, stating: “All disputes regarding your employment with [the company], or the termination of your employment, will be subject to final and binding arbitration pursuant to the provisions of the Federal Arbitration Act.”

The Employee Handbook also contained the following language: “This Employee Handbook may be amended, revised and/or modified by [the company] at any time without notice. If you have any questions about this please contact the Human Resources Department.”

Another provision in the Employee Handbook read: “This Handbook is not intended to create a contract of employment and does not in any way alter the at-will employment relationship between [the company] and its Employees.”

In 2009, the Employee Handbook was amended to include the following clause: “Employees will be required to sign for receipt of the handbook acknowledging inclusion of the arbitration policy stated in the handbook. Also, Employees will be required to sign a full arbitration agreement that is signed by both the Employee and the Human Resources Director or designee.” The employee did not sign a full arbitration agreement.

In 2010, the employee was terminated. He filed a lawsuit against the employer, alleging his reason for termination was pretextual and was due to the employer wanting to retaliate against him for opposing unlawful policies. The employer sought to have the case dismissed and the arbitration agreement in the Employee Handbook enforced.

The court refused to dismiss the case, finding the arbitration agreement was invalid. The court exlained: 1) the employee was not bound by the arbitration clause because it was included in a lengthy Employee Handbook; 2) the arbitration clause was not called to the attention of the employee; 3) the employee did not specifically acknowledge or agree to the arbitration clause; 4) the Employee Handbook stated it was not intended to create a contractual relationship; and 5) the Employee Handbook provided it could be amended unilaterally by the employer thus rendering any agreement illusory.

The court noted arbitration agreements and their enforcement were contractual matters. The employer bears the burden of establishing that a contract exists. The employer failed to do so due to the wording of the Employee Handbook.

According to the court, the Employee Handbook was, by its own terms, informational rather than contractual. Although the employee had signed an acknowledgment of its receipt, this alone is insufficient to create a valid arbitration agreement. Under the express terms of the acknowledgement, the employee only agreed to “read and understand” the contents of the Employee Handbook. He did not agree to be bound by its provisions. More importantly, he did not expressly waive his right to a judicial forum in which to resolve his disputes with the employer.

The bottom line is that the court refused to enforce the arbitration clause because no contract existed between the parties. Had the employer requested the employee sign a separate employment arbitration agreement, the case might have ended differently.

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