Is Your Arbitration Agreement Enforceable?

Employers often prefer arbitration as the sole means for resolving employment-related disputes with their employees. An employee has a basic right to resolve all disputes through the courts, however, so in order for arbitration to be the exclusive means of resolving these disputes, the employer and employee must agree to this in writing. Employers may have an employee sign a stand-alone arbitration agreement, or they may have an employee sign and agree to the terms of an employee handbook that includes an agreement to arbitrate. In either case, an enforceable arbitration agreement or provision must be carefully crafted, and it must incorporate certain elements to be deemed valid.

For an arbitration agreement to be valid, it must apply equally to both the employer and the employee – both must be agree and be bound by the agreement that all claims are to be arbitrated.  Not only must the employee agree that all claims brought by the employee against the employer be subject to arbitration; the employer must also agree that all claims brought by the employer against the employee be subject to arbitration.  There are some exceptions allowing an employer to carve out certain claims that need not be arbitrated, or giving an employer alternative avenues of relief in addition to arbitration, but those are limited exceptions to the general rule that arbitration must be the exclusive means for all claims for all parties.

In addition, the agreement cannot include language stating that it can be modified or changed at any time by the employer at the employer’s sole discretion.  Courts have held that such language invalidates an arbitration agreement and renders it unenforceable.

Similarly, if the agreement is incorporated into an employee handbook, there must be language stating that both parties are bound by the arbitration provision in the handbook and that it cannot be unilaterally changed or modified by the employer.  This is often in conflict with typical provisions of a handbook; an employer often reserves the right to modify or change a policy or handbook provision at any time, which is an important provision any employer should include.

A recent case, Coady v. Nationwide Motor Sales Corp., 32 F.4th 288 (4th Cir. 2022), highlights how using this kind of language can make an arbitration provision unenforceable. In Coady, the Court agreed that an employee’s signature – acknowledging receipt of an employee handbook that had an arbitration provision – was in effect a binding agreement to arbitrate employment-related claims. However, because the employer included language stating that it retained the right to change or modify policies in the handbook, the Court concluded that the provision was not enforceable. The Court concluded that this language rendered the arbitration “illusory, and thus invalid.”

Accordingly, it is highly recommended that if an employer wishes to compel arbitration as the sole means for resolving claims with employees, the employer should have employees sign stand-alone agreements rather than incorporating them into or making them part of an employee handbook.

Another element of an arbitration agreement or provision that must be considered in terms of its enforceability is any language that limits the time period in which a claim must be brought.  In particular, language or a provision that shortens the limitations period for claims otherwise brought in court must be reasonable.  For example, a recent case held that an arbitration agreement containing a shortened one-year statute of limitations to file an arbitration claim over any employment-related disputes was enforceable, even though the limitations period set by statute for such claims is three years.  The court noted that under Maryland law, parties can agree by contract to shorten statutory limitations periods, as long as the period is not “unreasonably short.” The court determined that the shortened one-year statute of limitations was reasonable, and other courts have even held that a six-month limitations period is reasonable.  However, since the limitations period must apply equally to claims brought by the employer as it does to claims brought by the employee,  language that shortens the time period must be considered carefully.

While arbitration agreements can be useful in handling and managing employment-related claims brought by employees, such agreements must be carefully crafted in order for them to be deemed enforceable and valid.  If you are thinking about implementing such an agreement in your business, or if you have one in place that needs to be reviewed, please consider contacting the attorneys in our Labor and Employment Group to guide you through that process.

For questions about this article, or any other employment law related matter, please contact an attorney in our Labor & Employment practice group.