Do Not Include Arbitration Agreements in Your Employee Handbook

This was the lesson that a company recently and sadly learned, when the U.S. Court of Appeals for the Fourth Circuit found its arbitration agreement to be invalid because of the handbook disclaimer.

In Coady v. Nationwide Motor Sales Corp., the employer’s Employee Handbook contained an arbitration agreement, which provided that the employee’s signature on the handbook receipt confirmed the employee’s understanding of the agreement. The handbook receipt itself stated that the handbook was a reference source for policies, procedures and benefits, and that the employer reserved the right to “enforce, change, abolish or modify” existing policies, procedures and benefits “as it may deem necessary with or without notice.” The Fourth Circuit found that this language rendered the arbitration agreement invalid since “Under Maryland law, a promise to arbitrate is illusory—and thus cannot constitute the consideration necessary to support a binding contract—if the employer reserves the right to alter, amend, modify, or revoke the Arbitration Policy . . . at any time with or without notice.”

As a general matter, handbooks typically include disclaimers to prevent employees from claiming that the policies constitute some sort of contract. That means it is critically important for employers to keep separate from the handbook any agreements that they want to be able to enforce – such as arbitration agreements or restrictive covenants.