Employee handbooks are an essential legal document that every California small and medium business (SMB) should have. An effective employee handbook spells out what you expect from your employees and helps protect your business from potential lawsuits. But if you want an enforceable arbitration agreement for employment disputes don’t bury it in your employee handbook. Use a separate stand-alone arbitration agreement.
Second District Holds Employee Handbook Did Not Create a Binding Contract
Can an employee handbook include an agreement between the employer and employee to arbitrate employment disputes?
That used to be clear. And the answer used to be “yes.” But given ongoing judicial hostility towards arbitration certain California courts will use any excuse to strike down arbitration agreements in the employment context.
A recent decision by one California state appeals court, Esparza v. Sand & Sea, Inc., tells California employers to exercise caution if they want to maximize enforceability of arbitration agreements with employees.
The employer in this case operates a hotel in Los Angeles. The plaintiff was an employee. On her first day of work, the plaintiff received a copy of the hotel’s employee handbook. The handbook contained a two-page “Agreement to Arbitrate.” Under this Agreement, the employee agreed to use “binding arbitration to resolve all disputes that may arise out of the employment context.”
Elsewhere, however, the handbook stated the document was not “an express or implied contract of employment.” The employee was also required to sign a statement acknowledging she had received the handbook and that she would read the document “in its entirety” within one week of starting her job.
After about nine months, the employee quit and filed a lawsuit, alleging she was the victim of sex harassment, sex discrimination and wrongful termination. The hotel moved to enforce the Arbitration Agreement and remove the case from court. The trial court denied the motion. The hotel appealed.
On August 22, the California Second District Court of Appeal, which has jurisdiction over all trial courts in Los Angeles and the surrounding areas, issued a published opinion affirming the trial court’s decision. The Second District agreed it was proper to deny the hotel’s motion to compel arbitration.
The Second District did not find the terms of the Arbitration Agreement were improper. Rather, it held that no “agreement to arbitrate” existed in the first place. In other words, the Second District said the hotel’s employee handbook did not create a binding contract to arbitrate employment and labor law claims between itself and its employee.
Problem 1: The Handbook Itself Stated It Was Not A Contract
The first problem for the employer was its welcome letter for the handbook stated “the handbook is not intended to be a contract (express or implied), nor is it intended to otherwise create any legally enforceable obligations on the part of the Company or its employees.”
The hotel argued this statement only meant that the handbook was not an “employment” contract. That’s a problem given the express language to the contrary. And that’s how the court ruled. The “handbook was not intended to create ‘any legally enforceable obligations,’ including a legally enforceable obligation to arbitrate,” said the court.
Problem 2: The Employee Had Not Read The Handbook Arbitration Provision
At least that’s what the court concluded from the employee handbook acknowledgment signed by the employee.
The handbook acknowledgment stated, “I also acknowledge that I am expected to have read the Employee Handbook in its entirety no longer after one week after receiving it.” The court used this as evidence that the employee had not read the handbook (and therefore the arbitration agreement) at the time she signed the acknowledgment. The court said it had “no basis to assume [the employee] agreed to be bound by something she had not read.”
The court also said the signed acknowledgment statement was inadequate because it broadly referred to “various policies, practices, and procedures” in the employee handbook without specifically mentioning the Arbitration Agreement itself.
Use Stand-Alone Agreements to Arbitrate
The Second District’s opinion in Esparza underscores a shift in California law against the enforcement of arbitration agreements contained in employee handbooks. While the Second District did not actually say that such arbitration agreements are invalid, the court has invited judges to place additional scrutiny on the precise wording of employee handbooks and acknowledgments.
In prior cases, California courts had ruled an employee’s signature acknowledging they read and understood a handbook was enough to enforce an incorporated arbitration agreement.
For example, in a 2013 decision, Serpa v. California Surety Investigations, a different panel of the Second District sided with the employer in enforcing an arbitration agreement contained in an employee handbook. The facts in Serpa were similar to Esparza. In Serpa, the employee received a handbook on her first day of work. The handbook contained an arbitration agreement. The employee also signed an acknowledgment that she had received the handbook, reviewed and understood its terms, and agreed to be bound by them.
Similarly, the First District Court of Appeal held in a 1998 case, 24 Hour Fitness, Inc. v. Superior Court, that where an employee signed a “certificate of acknowledgment of receipt and reading” an employee handbook, she was bound by an arbitration agreement referred to in the handbook. Both the 24 Hour Fitness and Serpa courts did not find the arbitration agreements “unconscionable” or otherwise contrary to California law.
The difference in Esparza, according to the Second District, was that neither of the previous courts “considered whether the parties had reached an agreement to arbitrate in the first instance.” The key factual difference is that the Serpa and 24 Hour Fitness acknowledgments stated the employee “reviewed” the handbook and “read” the handbook, respectively; the Esparza acknowledgment only said the employee was “expected” to read it “no longer than one week after receiving it.”
And where the employee merely acknowledges it will read the handbook later that’s enough to torpedo the agreement. They haven’t read it so how can they agree to it?
What Your Small or Medium Business Needs to Know
So where does this leave California small and medium business owners who wish to take advantage of arbitration? Here are a few basic things that you need to keep in mind:
- An agreement to arbitrate is a contract between you and your employees.
- As with any contract, the parties must agree to the terms. The legal burden of proof in California is always on you, as the employer, to establish that an employee has agreed to binding arbitration.
- To increase the odds of an enforceable contact, make your arbitration agreement a stand-alone agreement. Do not bury it in an employee handbook.
- Typically, an employee handbook is not a contract, which is what the hotel employer above stated. And that worked against them. An employee handbook contains your company policies, policies you can change at will.
- Unfortunately, as the Esparza case illustrates, if you don’t make your arbitration agreement clear and/or you don’t follow California or federal arbitration law, you may end up spending significant time and money fighting for the right to arbitrate in court.
Get Help From an Experienced California Labor Lawyer
The case illustrates that it is easy to mess things up if you don’t stay on top of California labor laws.
An employee handbook is not required by law but is a best practice for any California employer. A properly crafted handbook contains relevant California and federal labor law, as well as key policies (i.e. “rules”) for your small or medium business. An employee handbook is the single most effective tool to reduce your employee lawsuit risk.
Nor is an employee handbook a one-time project. As your business grows or California labor law changes, your handbook will need to change. That’s why proactive employers review and revise their employee handbooks on a regular basis.
Employment arbitration is very complex. Both California law and federal law apply. And the law is constantly changing as a result of court decisions like Esparza. Keeping your arbitration agreement “state of the art” is key to its enforceablility.
An experienced California employment lawyer can assist you with preparing or revising an employee handbook or employment arbitration agreement. And if the need arises, an experienced labor lawyer can fight to enforce that arbitration agreement in court and use your legally compliant employee handbook to your advantage.
The attorneys at VisionLaw® are dedicated to providing Fortune 500 quality legal and HR solutions for California small and medium businesses. Contact us today if you would like to speak with one of our attorneys about your legal needs.