California Court Strikes Down Arbitration Clause in Employee Handbook

As employers increasingly consider adopting mandatory arbitration agreements for employment disputes following last year’s Supreme Court decision upholding class arbitration waivers in Concepcion, there is an increasing need to review old agreements and policies contained in Employee Handbooks to ensure that they do not render such attempts futile. Nowhere was this demonstrated more clearly than in the recent decision in Sparks v. Vista Del Mar Child and Family Services, issued on July 31, 2012, in which the court denied the enforcement of a policy requiring arbitration because of its inclusion in a handbook which contained general language permitting an employer to change its terms unilaterally and stating that it was “not an agreement.”

Vista Del Mar Child and Family Services hired Perry Sparks as a temporary employee in January 2007. Sparks alleged that he was permanently hired in April 2007 as a controller and was terminated for pretextual reasons in 2010 after he complained of various employee practices that he asserted violated federal and state reporting and compensation laws. Sparks filed a wrongful termination lawsuit. Vista Del Mar filed a motion to compel arbitration based on the arbitration policy contained in the handbook.

The court denied the motion to compel arbitration, citing numerous deficiencies surrounding Vista Del Mar’s arbitration policy.

First, the court noted the arbitration clause, in the form of a “Dispute Resolution Policy,” was buried at page 35 of the employee handbook, in the same type and size as other provisions of the handbook. The policy was not prominently distinguished, not specifically highlighted, and there was no place for the employee to acknowledge the policy in writing. The court noted that Vista Del Mar corrected these deficiencies in a later handbook issued in 2009 that not only required employees to sign for receipt of the handbook acknowledging inclusion of the arbitration policy, but also required employees to sign a full, separate arbitration agreement. Unfortunately for Vista Del Mar, Sparks did not sign the 2009 handbook acknowledgment, or the separate arbitration agreement.

Thus, Vista Del Mar was left with the 2006 handbook Dispute Resolution Policy. The court noted that immediately after the Dispute Resolution Policy, the handbook contained an Amendment, Revisions, and Modifications Policy, which stated “this handbook is not intended to create a contract of employment and does not in any way alter the at-will employment relationship between” Vista Del Mar and its employees. The court found that such language did not bind Sparks to arbitration as it negated the contractual nature of the Dispute Resolution Policy. Vista Del Mar could not “have it both ways” by claiming the handbook was not a contract but then argue that Sparks was bound to arbitrate employment disputes through the same document.

Further, the acknowledgment Sparks signed provided that Vista Del Mar could “change, rescind or add to any policies, benefits or practices described in the Handbook from time to time in its sole and absolute discretion, with or without prior notice.” The court found Vista Del Mar’s ability to unilaterally modify the handbook rendered the agreement to arbitrate in the Dispute Resolution Policy illusory – even though it has been held that such a right does not nullify an arbitration agreement so long as it is exercised fairly and in good faith. 24 Hour Fitness, Inc. v. Superior Court(1998) 66 Cal.App.4th 1199, 1214.

The court was not finished, and faulted Vista Del Mar for not providing a copy of the American Arbitration Association (“AAA”) rules to Sparks as the Dispute Resolution Policy specifically incorporated the AAA rules. Further, the court determined the policy was unconscionable because it did not meet the minimum requirements set forth in Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal.4th 83 (2000). The policy language required employees to relinquish administrative and judicial rights under federal and state law, and contained no express provision regarding discovery rights.

What This Means For Employers

Above all, the Sparks case stands as just another example of the extreme judicial hostility some courts still have towards arbitration agreements in the employment setting. It is difficult to balance the employer’s desire to avoid eroding the at-will presumption and avoid creating an implied agreement not to terminate employees but for good cause against creating a contractual and enforceable obligation to arbitrate employment disputes. Arbitration agreements that are separate from the employee handbook allow for clearer distinction between these competing objectives. Further, to guard against the possibility of such agreements being invalidated, employers should consider using a stand-alone agreement which (1) specifies that all claims against the employer and its officers, directors and employees are arbitrable under the Federal Arbitration Act; (2) excludes only claims for administrative charges filed with the EEOC and DFEH (which the Sparks policy failed to do), as well as unemployment and workers’ compensation insurance, and unfair labor practice charges filed with the NLRB; (3) provide reference or access to the rules of the tribunal which will be administering the arbitration; (4) provide that to the fullest extent permitted by law, the claims asserted in arbitration shall not be joined or consolidated with those of other parties; and (5) provide that it is the entire agreement between the parties with respect to dispute resolution and can only be modified by both parties in writing. By including such provisions, employers should be able to maximize their ability to enforce arbitration agreements should the time come for them to do so.

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