Employment Handbook Not a Contract By Its Terms

Employment Handbook Not a Contract By Its Terms

August 24, 2016
Paul K. Schrieffer

The California Court of Appeal, Second District, has refused to enforce an arbitration provision in an employment handbook. The appellate court held that because the company’s “welcome letter” to employees stated that the handbook does not constitute an express or implied contract, nor create any obligations, there could be no “agreement” to arbitrate notwithstanding an arbitration provision in the handbook.In Esparza v. Sand & Sea, Inc. (August 22, 2016, 2016 DJDAR 8745), an employee brought suit against her employer, a hotel, for wrongful termination, sexual harassment, sex discrimination and intentional infliction of emotional distress. The employer waited almost a year before filing a motion to compel arbitration. Apart from its lateness, the trial court denied the motion to compel arbitration stating that there was no enforceable agreement to arbitrate. On appeal, the Court of Appeal affirmed the trial court and, again, denied the motion to compel arbitration.

The language in the employer’s welcoming letter to employees, sent to this plaintiff Esparza as well, stated “Neither this manual nor its contents constitute, in whole or in part, either an express or implied contract of employment with” the employer. It is not clear why this language was crafted, though it may have been to protect the employer from having to follow its rules regarding progressive discipline, or something else entirely. However, the Court of Appeal seized on this language to conclude there was no contract to arbitrate, hence, the company could not compel the employee to arbitrate – despite the fact that the language in the arbitration provision reads as if it is in fact an agreement.Since the late 1990s, courts in California have been skeptical of employer-mandated arbitration provisions, and federal courts, including the U.S. Supreme Court, have overturned California court rulings that refused to enforce arbitration provisions. The U.S. Supreme Court has expansively construed the Federal Arbitration Act (“FAA”) and enforced various arbitration provisions over the past 15 years. One avenue it has left open to those opposing enforcement of arbitration provisions is to find the contract is either not consented to or is unconscionable. However, these are ultimately narrow avenues for employees or others to pursue to avoid arbitration. The Esparza case provides an example of how an overly cautious approach in a “welcome letter” can undermine enforcement of an arbitration provision contained in an employee handbook.

We recommend employers review their employment handbooks and welcome letters, if any, and avoid language similar to Sand & Sea, Inc. It is better to say nothing one way or the other about enforcement or about whether the manual or handbook is or is not a contract.

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