Paul Peter Nicolai
Right to Modify Employee Handbook Voids Arbitration
Updated: Apr 13
An employer who puts an arbitration agreement in an employee handbook cannot enforce it if it maintains the right to modify the handbook. A federal court of appeals held that the arbitration agreement was illusory because the employer retained the unilateral right to amend it without notice to employees.
Former employees sued a company in a wage dispute. The company moved to compel arbitration. To support its motion, the company submitted its employee handbook. It included a section that required arbitration of employment claims.
The former employees opposed the motion, arguing the arbitration agreement was invalid because the company retained the right to change, abolish or modify existing policies, procedures, or benefits applicable to employees as it may deem necessary with or without notice. The trial court held that the arbitration agreement was illusory because of the modification clause and denied the motion. The company appealed. The appeals court affirmed the district court.
Using Maryland law, the appeals court determined that the modification clause of the acknowledgment receipt invalidated the arbitration agreement as illusory. According to Maryland law, a promise to arbitrate cannot constitute the consideration necessary to support a binding contract if the employer reserves the right to alter, amend, modify, or revoke the arbitration policy at any time, with or without notice. According to the court, the modification clause in the acknowledgment receipt applied to the arbitration agreement because the sections of the handbook, including the arbitration agreement, were explicitly listed in the receipt immediately above the paragraph containing the modification clause.
The outcome of this case is not surprising since the arbitration provision is in an employee handbook that could be altered at any moment.
It is believed this ruling may be repeated elsewhere.
WHY THIS IS IMPORTANT...Employers who want to maintain the ability to arbitrate employment claims while still maintaining the ability to modify or eliminate policies in employment handbooks should strongly consider separating the employee handbook and the arbitration agreement into separate documents or making it clear that the right to modify or eliminate policies does not apply to the arbitration provision.