United States: Is Your Arbitration Agreement In An Employee Handbook? The Eighth Circuit Issues A Reminder: Arbitration Agreements Must Be Contracts

A properly implemented employment arbitration program can provide a variety of benefits to employers and employees alike.  Many employers have robust arbitration programs that require both the employer and its employees to arbitrate any covered claim either may have against the other.  These arbitration programs also very often contain a class and collective action waiver, whereby employees who are part of the program agree not only to waive a jury trial in favor of arbitration but also to waive their right to proceed collectively in a class or collective action lawsuit against their employer.  The United States Supreme Court has issued a series of opinions in recent years that leave no doubt as to the enforceability of employment arbitration agreements that contain class and collection action waivers.  The result has been to provide employers with an important tool to stem the ever-increasing tide of class and collective employment-related litigation.

Last week, however, on the heels of the Supreme Court's recent pro-arbitration pronouncements, the U.S. Court of Appeals for the Eighth Circuit issued a reminder that, although agreements to arbitrate are favored under the law, arbitration agreements must still be contracts.  In order to enforce an agreement to arbitrate, therefore, the employer must prove that a valid contract to arbitrate was created.  This may seem self-evident, but in an era where some arbitration programs are contained only in employee handbooks or on-line, this is a point worth closer review.

Time to arbitrate...

In Shockley v. PrimeLending, no. 18-1235 (8th Cir.  July 15, 2019), the company was faced with a collective action lawsuit under the federal Fair Labor Standards Act (FLSA) filed by a former employee who alleged that she, and all others similarly situated to her, were not paid for all of the hours worked and overtime earned.  The company immediately filed a motion to compel arbitration, arguing not only that the employee agreed to arbitrate her claims, but also that, by virtue of a delegation clause contained in the agreement, she also agreed to arbitrate threshold issues relating to the arbitration agreement, including whether her claims were subject to arbitration in the first instance.  Indeed, the company's arbitration agreement specifically required arbitration of FLSA claims like those the employee asserted, contained a class action waiver, and delegated the threshold issues regarding enforcement to the arbitrator.  It was therefore likely anticipated that the court would defer to the arbitration agreement given the current favorable judicial climate relating to the enforcement of arbitration agreements.  

Not so fast....

The company's arguments depended on proof that it and the employee were parties to a valid agreement to arbitrate disputes. The arbitration agreement and delegation clause on which the company relied, however, were contained solely in the company's Handbook Addendum (Handbook). This Handbook was not physically distributed to, or signed by, the employee.  Rather, during her employment, the employee was twice required to use a computer mouse to click on the Handbook, which included the agreement to arbitrate and delegation clause.  Once clicked, the company's computer system automatically generated an acknowledgement that the policy was reviewed. When the Handbook was clicked, the employee would also have received a link to open a full copy of the Handbook, but there was no evidence presented that she ever did so.  Moreover, the employee denied ever actually reading the arbitration policy.  

In examining whether an enforceable agreement to arbitrate was formed, the Eighth Circuit reminded that "[a]rbitration is a matter of contract law, and favored status notwithstanding, parties cannot be compelled to arbitrate unless they have contractually agreed to be bound by arbitration."  Shockley, slip op. 4 (citing Howsam v. Dean Witter Reynolds, Inc., 57 U.S. 79, 83 (2002)). The court looked to determine whether the company established all of the elements of an enforceable contract under governing Missouri law, first with respect to the delegation clause—a severable antecedent agreement—and ultimately with respect to arbitration of the underlying claims.  Specifically, the court observed that there must be a definite offer, unequivocal acceptance and consideration for either agreement to be enforceable.

Ultimately, the Eighth Circuit concluded that no contract to arbitrate any issue was formed by the Handbook.  In doing so, the court focused on whether the employee's clicking on the Handbook link constituted acceptance of any contractual offer that could be found to fairly have been made by the delegation clause or the broader arbitration provisions contained in the Handbook.

In many states, including Missouri, the mere continuation of employment is not manifestation of assent to an arbitration agreement.  But the Eighth Circuit recognized that "continued employment may constitute acceptance where the employer's document clearly states that continued employment constitutes acceptance, and the employer informs all employees that continued employment constitutes acceptance."  The company's Handbook, however, contained no such language.  Rather, the Eighth Circuit found that, at best, the company could show that the employee was generally aware that the company had an arbitration agreement and delegation provision, and that while she might have been generally aware of the company's offer, her "document review, and the subsequent system-generated acknowledgement, does not create an unequivocal acceptance." 

In other words, mere review of a delegation clause or agreement to arbitrate is not sufficient to form a contract without proof of assent to the agreement's terms.  For this reason, the Eighth Circuit affirmed the district court's denial of the company's motion to compel arbitration in its entirety. 

So what now?

It is possible to maintain an enforceable mandatory arbitration program; indeed, federal law has never been more favorable to enforcement of agreements to arbitrate employment disputes. For employers to effectively implement a mandatory arbitration program—including those with a class and collective action waiver—it is not enough to tell employees in a handbook that they must arbitrate and to simply distribute an arbitration policy without developing further proof that the employee has accepted the policy as a contractual commitment to arbitrate covered disputes.  Indeed, the lesson of PrimeLending is that an employee's acceptance of an arbitration agreement should not be vague or unclear, and should be clearly expressed by the employee.

A contractual offer to arbitrate can still be presented in an employee handbook.  However, that offer must be clear and definite, which is a matter calling for careful drafting of the handbook, including its references to arbitration, and elimination or limitation of disclaimers contained in the handbook that would fuel an argument that the parties never entered into a binding contract.  Where an agreement to arbitrate is contained in a handbook that contains a disclaimer that the handbook, for example, is "not a contract" or that otherwise permits the handbook to be amended at the discretion of the employer, there is risk that a court will find that the proposal to arbitrate contained in the handbook was not a contractual offer capable of acceptance and binding on the employee.

Key Takeaways

In an age where arbitration agreements find routine enforcement in the courts, Shockley v. PrimeLending provides a valuable reminder that, at bottom, agreements to arbitrate must be contracts.  While in most cases arbitration agreements will be covered (and protected) by the Federal Arbitration Act, enforcement of an arbitration agreement is governed by state law contract principles applicable to ordinary contracts, and these principles uniformly require an offer, acceptance and consideration.

One option to help employers ensure that their arbitration agreements are enforced is to distribute the arbitration agreement to employees as a stand-alone agreement (i.e., not part of a handbook) that requires the employee's signature documenting the employee's acceptance of the contractual offer. If the arbitration agreement is entirely separate from the handbook, any disclaimers contained in the handbook are less likely to impact enforcement of that agreement.

Where agreements to arbitrate are contained in an employee handbook or otherwise distributed on line, employers should consider:

  • Is the offer to arbitrate stated clearly, and how will the employer prove in court that the employee received, reviewed and accepted it?
  • Are there disclaimers in the handbook or any other document that could be used to argue that a binding contract to arbitrate was never formed?
  • What consideration was provided for the agreement to arbitrate, and is the duty to arbitrate applicable to both the employee and employer?

Confirming the answers to each of these questions might make the difference between whether an arbitration provision is enforced or whether the company is faced with a class or collective action in court. Employers should review their handbooks and arbitration agreements to help ensure they can withstand attacks like that presented in PrimeLending.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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