Arbitration Clause, Prepare to Meet Your Doom

On November 24th, the Fourth Circuit Court of Appeals doomed one North Carolina Employer from enforcing an arbitration clause in its employment handbook -- even though the Employee admitted to receiving and acknowledging receipt of the handbook and continued to be employed by the company for several years.   If you have an arbitration clause in your employment handbook that directs all dispute traffic to an arbitrator's desk instead of  judge's court, you will want to read this very carefully.  

In Lorenzo v. Prime Communications, L.P., Prime Communications did what many employers do: they created a dispute resolution process for employee complaints.  However, their handbook also included a provision that stated any disputes will be arbitrated and as such employees waive their right to litigate employment disputes.  Although arbitration clauses in employment agreements are controversial and remain unfavored in many federal circuits, the Fourth Circuit has generally been okay with these provisions, assuming the employee agrees to arbitrate any claims.  (Key word: Agree).  

The problem in this case is that the employment handbook said several times that the handbook is not a contract for employment and not legally binding (or "bindery" as it was misspelled in the actual handbook).  On the employment handbook receipt signed by the Employee, it states the same and even adds that the employment handbook is merely suggestive and not binding.  You are probably scratching your head because this handbook receipt says what all of them should:  the handbook is not a contract for employment and should not remove the employee from the at-will employment status.  But when you include an arbitration requirement inside the employment handbook, it too would fall under the umbrella disclaimer "this is not a contract."  

The Fourth Circuit Court of Appeals doomed the arbitration clause in Prime's employment handbook because Prime's "this ain't no contract" language doomed the arbitration clause as just another non-binding part of the handbook.  That is quite a hefty lesson learned for Prime who has now lost their appeal to enforce the arbitration clause and now has to litigate (or settle) the employment dispute inside a good old fashioned court room with a jury and a judge.  

How do you avoid this?  For starters, know that courts will not enforce an arbitration clause unless its in the form of a contract between the parties.  This means it must be formed between parties with a meeting of the minds and it must fit all the other characteristics of a legally binding contract, consideration included.  Consider making the arbitration provision a separate written agreement between employee-employer (HINT: make sure any such contract states the employee is still "at-will").  Another option is to keep it in your handbook but make sure any "this is not a contract" language carves out the arbitration clause as the sole exception.  This, for many of you, will require a good look at your current handbook and a revised handbook receipt (which I hope everyone has from EVERY employee).  

If you're confused about this, you're in luck because I love reading handbooks and marking them up with my red pen.  Employment laws change constantly so we always advise you give it a good look every year and a more thorough review every three.  Unlike Prime, you are not doomed because we got your back.