April 28th, 2022

Is the Arbitration Provision in Your Employee Handbook Enforceable? Fourth Circuit Invalidates ‘Illusory’ Arbitration Agreement Based on Catch-All Employee Acknowledgement Page

Employers who prefer to arbitrate employment-related disputes should take note of a recent Fourth Circuit decision concerning the enforceability of arbitration agreements that are incorporated into employee handbooks. The court held this week that an arbitration agreement was unenforceable where an employer reserved the right in its employee handbook to amend or abolish its policies and procedures without notice to employees. The decision helps clarify when a court will look outside the literal four corners of an employee arbitration agreement when deciding whether to compel arbitration.

In Coady et al. v. Nationwide Motor Sales Corp., Case No. 20-2302 (4th Cir. April 25, 2022), a group of former employees sued Nationwide Motor Sales Corporation in federal district court, alleging fraudulent payment practices. Nationwide moved to stay or dismiss the district court case in favor of arbitration, citing a section of its employee handbook that contained an agreement to arbitrate all employment-related claims. The district court denied Nationwide’s motion on the ground that the arbitration agreement was merely an illusory promise.

The Fourth Circuit affirmed the district court’s denial. The problem for Nationwide, according to the court, was that the acknowledgement page of Nationwide’s employee handbook contained a clause giving Nationwide the right to “change, abolish or modify existing policies, procedures or benefits applicable to employees as it may deem necessary with or without notice.” That clause triggered the Maryland common-law rule that a promise to arbitrate is illusory (and thus cannot support a binding agreement) if an employer reserves the right to “alter, amend, modify, or revoke” its arbitration policy “at any time with or without notice.” Cheek v. United Healthcare of Mid-Atl., Inc., 835 A.2d 662 (Md. 2003).

The key issue in Coady was whether Nationwide’s reservation of rights on the acknowledgement page of its employee handbook applied to the arbitration agreement (thus invalidating the agreement as an illusory promise). Nationwide argued that under Maryland law, courts are not allowed to look beyond an arbitration provision itself and into an underlying employment agreement to determine whether a promise to arbitrate is illusory. See Cheek, 835 A.2d at 664-65 (Md. 2003); Hill v. Peoplesoft USA, Inc., 412 F.3d 540, 543 (4th Cir. 2005). In Coady, however, the court found that the acknowledgement page in Nationwide’s handbook actually formed part of the arbitration agreement itself.

The court cited two key references in support of its finding that the arbitration agreement incorporated the acknowledgement page. First, the arbitration agreement provided that an employee’s signature on the acknowledgement page constituted assent to the arbitration agreement. Second, the acknowledgement page specifically identified the arbitration agreement as one of the employee handbook sections to which the acknowledgement page applied. Both of those references distinguished the arbitration agreement in Coady from one that was held to be enforceable in Hill. Whereas Coady involved an arbitration agreement and acknowledgement page that each expressly referenced the other, Hill involved a freestanding arbitration agreement that was separately signed by the parties and did not include any provision allowing for its unilateral modification by the employer.

The lesson for employers is to take a careful look at employee handbooks to ensure that employer-friendly catch-all acknowledgement pages do not inadvertently invalidate arbitration agreements. In light of the Coady decision, employers who prefer to arbitrate employee disputes should consider freestanding arbitration agreements rather than incorporating such agreements into more general compilations of policies and procedures.

Grammata Law Firm helps clients navigate disputes involving current and former employees, including employment discrimination claims, non-compete issues, and other employment matters. For more information, contact Grammata at 202-937-0458 or .