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Arbitration Clause in Employee Handbook Found Not Enforceable

In the recent New Jersey Appellate Division decision C.M. v. Maiden Re Insurance Services, LLC, et al., A-2913-13T1 (App. Div., Sept. 18, 2015), the Court refused to enforce an arbitration clause contained within the employer’s employee handbook.

This case arose in the context of plaintiff’s claim under the New Jersey Law Against Discrimination, where the plaintiff claimed the defendant employer failed to reasonably accommodate her disability and ultimately terminated her employment based on that disability.  The employer moved to dismiss her complaint and compel binding arbitration based upon an arbitration clause contained in the employee handbook.  The trial court agreed with the employer and compelled arbitration, but the Appellate Division reversed, holding that the “ostensible arbitration clause in [the employer’s] employee handbook … is irreconcilable with the expressed language in other sections of the same handbook that prominently and unequivocally disclaim the handbook is intended to create a legally enforceable contract between [the employer] and its employees.” The handbook specifically provided that its terms and conditions were not intended to create a contractual relationship. The Court further found that plaintiff’s electronic response acknowledging receipt of the handbook was insufficient to constitute a knowing waiver of her right to have her discrimination claims decided by a jury.  Finally, separate and apart from these issues, the Court concluded that the language of the arbitration clause was inadequate in that it did not refer to plaintiff’s statutory rights, did not explain the nature of the arbitration proceeding, and did not plainly state that plaintiff was relinquishing her constitutional right to a jury trial.

While the Court recognized the public policy in favor of enforcing arbitration agreements, it also observed that there are limitations on this preference, and the first step in assessing enforceability is determining whether there is a valid agreement.  Here, the Court found that the plain language in the handbook established that the employer never intended the handbook to create a binding agreement.  In so concluding, the Court relied on the Disclaimer section of the handbook, which stated:

The policies outlined in this handbook should be regarded as management guidelines only …. The provisions of the handbook are not intended to create contractual obligations with respect to any matters it covers.  Nor is the handbook intended to create a contract guaranteeing that employees will be employed for any specified period.

The Court noted that the employer could not selectively choose to have some of the handbook provisions create contractual obligations, while disavowing contractual enforceability as to other provisions.  “The employee handbook cannot be a binding agreement with respect to the arbitration provision, and an unenforceable document merely containing ‘management guidelines’ for the rest of the provisions.”

Accordingly, the Court held that the handbook did not create a binding agreement with plaintiff, and therefore, she did not waive her right to a jury trial by acknowledging receipt of the employee handbook.

So, what’s the takeaway?

If your company intends to have its employees arbitrate their claims, then you should have them sign an appropriately drafted arbitration agreement that, importantly, is not contained within your company’s employee handbook.  Make sure your arbitration agreement is a stand-alone document that is written in plain language, understandable, clearly labeled, and clearly recites the statutory rights the employee is waiving by signing the agreement. This analysis also applies to many other types of employment agreements commonly in place in the workplace, such as confidentiality agreements or restrictive covenants.  Any agreement of this kind should be a separate document signed by both the employer and employee.

On the other hand, your employee handbook should have a clear and prominent at-will employment disclaimer, and this disclaimer, as well as other sections of the handbook, will reiterate that the employee handbook does not contain or create contractual rights.  The C.M. case leaves no doubt that if your employee handbook is drafted to include such contractual disclaimer language, the company will not have the ability to pick and choose provisions that it seeks to create contractual obligations, including an arbitration clause.  Implementing a free-standing, well-drafted arbitration agreement will help your company position itself to arbitrate claims brought by its employees.

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