Pitfalls of Arbitration Clauses in Employee Handbooks

An employee handbook is a necessary and familiar workplace fixture. A recent trend among employers is the inclusion of a mandatory arbitration clause, to avoid a jury trial in the event of employment-related litigation.  Both state and federal courts have recently grappled with the validity of arbitration clauses in the employment litigation realm, and have both concluded that such clauses are not enforceable.  These cases serve as a reminder that an employer must be vigilant should it wish to make such a clause part of its employment policies.

The first case arose when plaintiff filed a wage and hour claim against her former employer, which in turn filed a motion to compel plaintiff to submit to arbitration based on a mandatory arbitration provision in its employee handbook.  Employee had received this book at the outset of her employment and had also signed a form acknowledging receipt.  The trial court denied Employer’s motion and the Fourth Circuit affirmed.  In its holding, the Court noted that, though Employee’s conduct in continuing to work after receipt and review of the handbook would ordinarily create an implied assent, this assent was nullified because the acknowledgment form also stipulated that the handbook was not to be construed as a contract.  The Court’s decision was based largely on the reasoning that Employer’s endeavor to limit potential contractual liability using its employee handbook invalidated its attempt to rely on the handbook to create a binding duty to arbitrate.

Similarly, a recent New Jersey Appellate Division opinion had its genesis when Employee initiated an age discrimination claim.  The trial judge denied Employer’s motion to arbitrate.  The decision was affirmed on appeal, where the Court held that the disclaimer of contractual intent in Employer’s handbook rendered the arbitration clause unenforceable.  Significantly, the Court held a clause in an employee handbook requiring arbitration of job disputes is unenforceable when the handbook also contains a disclaimer stating that it is not a binding employment contract.  In addition, the Court held, an employee’s signature on a rider stating that the employee received and understood the handbook’s contents does not permit the employer to contend that the employee agreed to waive her right to sue.  According to the Court, Employer’s attempt to reap the benefit of its disclaimer of the contractual nature of the handbook, while also insisting that the handbook is contractual when it suits the company’s purposes, was an inequitable attempt by the company to, as the adage goes, have its cake and eat it too.

For employers, these decisions highlight the importance of paying attention to the nuances of the employee handbook and other documents provided to employees.  It also provides employees with another tool to avoid arbitration, and thus may require some companies to change the way they present arbitration agreements to employees.

Some things to keep in mind in the wake of these decisions:

  • Regularly Review.  Make sure your employee manuals, employment applications and other documents presented to new hires are updated frequently to ensure consistency with changing law, both state and federal.
  • Split up Sensibly.  If your company’s handbook contains a similar disclaimer and you wish to maintain a mandatory arbitration policy, present the clause and/or other provisions of your dispute resolution policy to an employee as a separate document, wholly independent of the handbook.  After you’ve created this separate waiver form, remember…
  • Consent must be clear.  Remember, in order for an individual to waive her right to a jury trial in a substantive civil rights claim, including employment-related litigation, that individual must affirmatively, knowingly and intelligently waive that right.  Accordingly, make sure the agreement “clearly and unmistakably” states that employees will arbitrate statutory claims and that they waive their right to sue in court.