Arbitration in the Handbook?
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Arbitration in the Handbook?

by Tal Korn

April 2013

Many employee handbooks contain language that requires claims against the employer to be arbitrated, rather than litigated. The looming legal question is whether such provisions are enforceable.

Generally speaking, employers and employees may be bound by a properly drafted arbitration agreement. However, the employee must clearly agree to submit disputes to arbitration - and, in turn, to waive a judicial forum - before a court will enforce an arbitration agreement.

A recent California case illustrates the problem. Perry Sparks, a controller, sued his employer for wrongful termination. When he was hired, Sparks received an employee handbook and signed an acknowledgement that he had read and understood the content and agreed to be bound by it.

Among the handbook's many provisions was a section titled "Dispute Resolution Policy," which provided that any employee disputes would be subject to binding arbitration - regardless of whether the claim was for wrongful termination, discrimination, retaliation, harassment, or other violations of state or federal law.

Despite the handbook, the court refused to grant the employer's petition to compel arbitration, finding that the arbitration provision was unconscionable and legally unenforceable. The court identified a series of procedural problems with the arbitration language, including the fact that it was one of numerous policies in the handbook, was not highlighted for the employees, and did not expressly advise that employees were waiving their right to a judicial forum. (Sparks v. Vista Del Mar Child and Family Servs., 207 Cal. App. 4th 1511 (2012).)

Sparks's written acknowledgement of his receipt and review of the handbook did not give rise to an enforceable contract because it failed to constitute evidence of a knowing agreement to arbitrate. According to the court, a separate acknowledgement of the employer's arbitration policy would have been a stronger indication that employees had been meaningfully informed of that policy and agreed to be bound by it. Further, because the handbook was subject to modification by the employer at any time, the arbitration agreement was determined to be illusory.

The arbitration provision was also deemed substantively unconscionable because it required Sparks to waive his administrative and judicial rights under state and federal statutes. More than a decade ago, the California Supreme Court held that agreements seeking to compel arbitration of Fair Employment and Housing Act or other civil rights claims must contain certain safeguards, such as providing for a neutral arbitrator, sufficient discovery, and a written award; and a requirement that arbitration fees be borne entirely by the employer. (See Armendariz v. Found. Health Psychcare Servs., Inc., 24 Cal. 4th 83 (2000).) Sparks was not guaranteed these safeguards.

The Sparks case signals that employers should review their current employee handbooks and take proactive measures to ensure that they have effective arbitration policies in place. For starters, employers should distribute a written arbitration agreement that is separate from any employee handbook. The agreement should make clear that employees who sign it are waiving their right to litigate employment-related disputes in a judicial forum.

Next, employers should require employees to acknowledge in writing their understanding and agreement to be bound by the arbitration policy as a condition of employment. Equally important, employers should verify that employees have actually signed the agreement - another recent case dictates that an employee's failure to sign an arbitration agreement indicates a conscious decision not to be bound by it. (Gorlach v. Sports Club Co., 209 Cal. App. 4th 1497 (2012).)

If the arbitration agreement is included within a handbook, employers should highlight its text with a distinct font and include a signature line immediately after, reciting the acknowledgement described above. The arbitration provision should be placed either at the beginning or at the end of the handbook to ensure that it is not buried (and hence overlooked) within a lengthy booklet. Employers should avoid language that reserves the right to unilaterally modify the arbitration agreement. Finally, it is prudent to distribute the arbitration rules along with the handbook itself.

The validity of employee arbitration agreements turns largely upon a factual analysis. Employers who follow these guidelines will have the strongest case for compelling arbitration, should they confront an employee's legal claim.

Tal Korn is an attorney with Freeman Freeman & Smiley in Century City, where she specializes in business and employment litigation.

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