Employers Beware: Your Employee Handbook’s Arbitration Clause May Not be Enforceable

by Tamara Rider

Young attractive businesswoman taking time out from a meeting

The Cost of Ambiguity.

Upon hiring a new employee, it is a common practice for most employers to provide the new employee with an employee handbook stating the general policies and procedures of the employer.  Sometimes employers will have an arbitration clause within the employee handbook, and thereby attempt to impose binding arbitration on the parties for any disputes between the employer and employee.  Most employers are also advised to have their new employees sign an acknowledgment which indicates that the employee read the handbook, understands its contents, and agrees to its terms.

Most employers assume, or are told, that receipt of the signed acknowledgment form ensures that the employee is bound by the handbook’s provisions, including the requirement that the employee arbitrate any employment-related disputes.  But, according to a recent California Court of Appeal, most employers are wrong.  Employers should not rely upon an arbitration clause in a prolix employment handbook unless the handbook is carefully crafted to ensure the arbitration clause’s enforceability.

In Sparks v. Vista Del Mar Child and Family Services, a California employer attempted to enforce an arbitration clause against an employee claiming damages as a result of his termination.  (Sparks v. Vista Del Mar Child and Family Services (2012) 207 Cal.App.4th 1511.)  In a July 30, 2012 decision, a Los Angeles-based Court of Appeal held that the employee was not bound by his employer’s arbitration clause located within the employee handbook because it “was included within a lengthy employee handbook; the arbitration clause was not called to the attention of plaintiff, and he did not specifically acknowledge or agree to arbitration; the handbook stated that it was not intended to create a contract; the handbook provided that it could be amended unilaterally by defendant and thus rendered any agreement illusory; the specific rules referred to in the arbitration clause were not provided to plaintiff; and the arbitration clause is unconscionable.”  (Id. at 1514.)

In Sparks, the employee was hired as a temporary employee in January 2007, was permanently hired in April 2007, and was terminated for pretextual reasons in 2010.  (Id.)  The employee filed a wrongful termination action for unfair business practices, violation of the Labor Code, intentional infliction of emotional distress, and other causes of action.  (Id.)  In response, the employer filed a petition to compel arbitration and stay the action, alleging that the former employee signed an employee handbook which identified that his work-related disputes were subject to binding arbitration.  (Id.)  The trial court concluded that the “mere acknowledgment of receipt of the Handbook was insufficient to create an enforceable arbitration agreement.” (Id. at 1517.)  The petition to compel arbitration was denied.  (Id.)

The trial court reviewed the employer’s handbook and identified two lengthy paragraphs which discussed work-related claims being subject to arbitration.  The trial court noted that these paragraphs stated that employer-employee arbitration would be subject to the provisions of the Federal Arbitration Act and the rules governing the arbitration proceeding would be those of the American Arbitration Association. (Id. at 1515.)  The trial court also noted that the handbook stated that the employer could unilaterally amend the employee handbook at any time without any notice to the employee.  (Id. at 1516.)  Finally, the trial court also also noted that one of the first paragraphs of the employee handbook stated that the handbook was not intended to create a contract of employment.  (Id.)

The employee signed the handbook’s acknowledgment form, which said “I understand that I am governed by the contents of the Handbook and that [employer] may changed, rescind or add to any policies, benefits or practices described in the Handbook from time to time in its sole absolute discretion, with or without prior notice.”  (Id.)  Notwithstanding his signature, the employee claimed that he was not made aware of the arbitration clause in the handbook.  (Id.)

The employee also claimed that he received a revised employee handbook in 2009, which obviated any contractual effect of his acknowledgment of the prior version of the handbook.  (Id.)  Such revised handbook had a similar arbitration clause to the prior version, except the revised arbitration clause included the following language: “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.”  (Id. at 1517.)

Failure to Identify the Arbitration Clause in the Acknowledgment

In upholding the trial court’s denial of the employer’s attempt to compel arbitration, the Court of Appeal stated that there was never a contractual agreement to arbitrate between the parties.  (Id. at 1522.)  The reason for this is that the 2006 arbitration agreement in the original handbook was not prominently distinguished from the other clauses.  (Id. at 1520.)  Even though the employer seemingly addressed this problem with the revised clause in the 2009 handbook, such efforts were to no effect, as the employee never acknowledged in writing that he received such handbook and agreed to its terms.  (Id. at 1519.)

The court also characterized the language in the 2006 handbook as “informational rather than contractual.  Thus, because defendant failed to point out or call attention to the arbitration requirement in the Acknowledgment, plaintiff should not be bound to arbitrate.”  (Id. at 1520.)  Further, “the acknowledgment form did not reference the arbitration clause, much less advise plaintiff that he would be bound by it.” (Id. at 1522.)

The Court specifically stated:

To support a conclusion that an employee has relinquished his or her right to assert an employment-related claim in court, there must be more than a boilerplate arbitration clause buried in a lengthy employee handbook given to new employees.  At a minimum, there should be a specific reference to the duty to arbitrate employment-related disputes in the acknowledgment of receipt form signed by the employee at commencement of employment.

(Id. at 1522.)

Ambiguous and Illusory Contract

The court also briefly addressed that any ambiguities can be construed against the employer/draftsman of the employee handbook.  “‘Efforts by an employer to have it both ways claiming that a handbook is not a contract [as here] but that an employee acknowledging receipt of a handbook has contracted to arbitrate any disputes with his or their employer can backfire.’”  (Id.) (quoting 1 Domke of Commercial Arbitration (2012), at § 16.11.)  The court also briefly stated that “[a]n agreement to arbitrate is illusory if, as here, the employer can unilaterally modify the handbook.”  (Sparks, supra, at 1523.)

Unconscionable Contract

The court also ruled that the contract was both procedurally and substantively unconscionable.  There was no evidence from the record that the arbitration clause was subject to negotiation, nor that the employee was ever provided the American Arbitration Association rules.  (Id.)  “‘Numerous cases have held that the failure to provide a copy of the arbitration rules to which the employee would be bound, supported a finding of procedural unconscionability.”  (Id., quoting Trivdei v. Curexo Technology Corp. (2010) 189 Cal.App.4th 387, 393.)  Additionally, the clause was substantively unconscionable because it required “the employee to relinquish his or her administrative and judicial rights under federal and state statutes [] and it [made] no express provision for discovery rights.”  (Id. at 1523.)

Lessons to Take from Sparks

It is important for employers to review their distributed employee handbooks and ensure that their arbitration clauses are clear, identifiable, and easy to distinguish from other provisions within their employee handbook.  If employers designate which rules govern the arbitration proceedings, they should provide the employee with a copy of those rules and identify whether discovery rights are available.  Finally, employers should specifically reference the arbitration clause in their employee acknowledgment form and reiterate to the employee that he or she agrees to be bound by it.

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