A Binding Provision Until It’s Not: Courts Find Broad Handbook Disclaimers Invalidate Arbitration Clauses

February 10, 2016

by Maria Tavano

It is common for employee handbooks to include clear disclaimers stating that the handbook does not constitute a contract, but two recent decisions show employers should exercise caution in using broad disclaimer language, or run the risk of unintentionally invalidating important arbitration provisions in their handbooks.

In the first case, published last month, the New Jersey Appellate Division found an arbitration clause contained in an employee handbook unenforceable when the handbook also contained disclaimer language expressly stating the handbook should not be construed to create a binding contract between the employer and employee.

In Morgan v. Raymours Furniture Co., published January 7, 2016, the plaintiff, Grant Morgan, a former employee who worked for the defendant parent company of the Raymour & Flanigan furniture store chain, claimed that after he complained of age discrimination, he was presented with an ultimatum by the defendants. Morgan alleged he was told he would have to sign a stand-alone arbitration agreement or be terminated. Morgan refused to sign the agreement and was subsequently terminated. Morgan then filed suit alleging, among other claims, a violation of the New Jersey state anti-discrimination statute and wrongful termination.

Despite Morgan’s refusal to sign the stand-alone arbitration agreement, the defendants moved to compel arbitration by relying on an arbitration clause contained in the employee handbook. Morgan denied ever actually reading or acknowledging receipt of the handbook, but nonetheless he consented to the trial court’s consideration of evidence produced by the defendants indicating he acknowledged receipt of the handbook in 2011, 2012, and 2013.

In reaching its decision, however, the New Jersey court looked beyond the arbitration provision to other language contained both in the handbook and in the acknowledgement forms. The court noted the preface of the employee handbook contained the following disclaimer language: “Nothing in this Handbook or any other Company practice or communication or document, including benefit plan descriptions, creates a promise of continued employment, [an] employment contract, term or obligation of any kind on the part of the Company.” The court also noted that the electronic acknowledgements included additional disclaimer language stating the rules, regulations, procedures, and benefits contained in the handbook were not promissory or contractual in nature. The court thus found the acknowledgement forms demonstrated only receipt of the handbook and lacked any language demonstrating Morgan expressly agreed to be bound by the terms of the arbitration clause.

The court reasoned that it would be inequitable to allow an employer, on one hand, to disclaim any and all promissory or contractual obligations in a handbook and, on the other hand, rely on that same handbook to argue that the employee clearly and unambiguously contracted away his right to sue the employer.

In response to the defendants’ arguments that finding the arbitration provision unenforceable would conflict with federal law, the court noted that just weeks after the parties argued their case, the United States Circuit Court for the Fourth Circuit reached a nearly identical conclusion in Lorenzo v. Prime Commc’ns, L.P., 806 F.3d 777 (4th Cir. 2015). The Lorenzo court found an arbitration clause contained in an employee handbook is unenforceable where the acknowledgement form signed by the employee expressly states nothing in the handbook was to be construed as a binding contractual obligation. The Fourth Circuit (covering Maryland, North Carolina, South Carolina, Virginia, and West Virginia) reached this conclusion notwithstanding North Carolina state law that holds an implied contract to arbitrate may be found where an employee learns of an employer’s requirement to arbitrate employee disputes and thereafter continues employment.

In light of the recent rulings in Morgan and Lorenzo, prudent employers should review their employee handbooks and any related acknowledgment forms. In the likely event those documents include similarly broad disclaimer language, the disclaimer should be revised to include conspicuous and unambiguous carve-out language regarding the arbitration provision. Moreover, acknowledgement forms - whether executed at or about the time of receipt of an employment handbook or subsequently - should clearly indicate not only that the employee has received the employee handbook, but also that the employee expressly agrees to arbitrate disputes with the employer.