Employers: Relying on an Arbitration Provision In Your Employee Handbook May Not Protect You

As this blog frequently reminds its readers, California state courts take a hard look at arbitration agreements in the employment context. The recent case: Sparks v. Vista Del Mar Child & Family Services, from the Second Appellate District of California provides additional support for why employers need to be extra careful in establishing enforceable arbitration provisions.

Mr. Sparks was hired as Vista Del Mar’s controller in April 2007 and was terminated three years later. He claimed he was fired in retaliation for complaints he had made about various employment practices. After filing his complaint in state court, Vista Del Mar filed a petition to compel arbitration of the dispute citing a provision in its employee handbook that all employment matters were subject to binding arbitration. The trial court denied the petition and refused to order the matter to arbitration. The California appellate court affirmed this decision (by a split 2-1 vote).

After Mr. Sparks was hired, he received a 2006 employee handbook and signed an acknowledgement that he had received and reviewed the handbook and agreed to abide by its terms. An arbitration provision appeared on pages 35 and 36 of the handbook in the same font and style as the other provisions in the handbook. The employee handbook contained language that it was not intended to create a contract of employment and both the handbook and acknowledgement stated that the employer was free to change, rescind or add to the policies, benefits or practices described in the handbook.

Mr. Sparks was later provided a 2009 employee handbook but (for some reason) was not asked to sign a new acknowledgement. The arbitration provision was nearly identical in the 2009 handbook as the 2006 handbook but provided additional language that the employee, in acknowledging receipt of the handbook, would also be agreeing to the inclusion of the arbitration provision.

The appellate court began by recognizing that “[a]rbitration is recognized as a matter of contract and a party cannot be forced to arbitrate something in the absence of an agreement to do so.” Although the subject arbitration clause provided for the application of the Federal Arbitration Act (“FAA”), the appellate court ruled that California state law would determine whether there was a binding contract to arbitrate and not the FAA.

In holding that the arbitration policy in the 2006 handbook was unenforceable, the Court found the following facts persuasive:

• The arbitration provision was not prominently distinguished from the other clauses nor was there any place for the employees to acknowledge it in writing;

• The acknowledgement of receipt of the handbook made no reference to the arbitration provision (unlike the later 2009 handbook);

• The handbook was “distributed” to all employees with language that suggested it was informational rather than contractual;

• The arbitration provision was “illusory” in that the employer could unilaterally modify the handbook, including the arbitration provision, at any time;

• The rules of the American Arbitration Association which were referred to in the arbitration policy were never provided to Mr. Sparks;

• There was no evidence that the arbitration provision was subject to negotiation nor did it provide any express provision for discovery rights should arbitration be ordered.

The Sparks case is a reminder to employers that they need to be extra careful when presenting employees with arbitration clauses and must take care to ensure that the employee’s acceptance of the arbitration policy is properly documented. Merely relying on the fact that an employee handbook has an arbitration provision is unlikely in itself to allow an employer to compel an employee’s lawsuit into arbitration.