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Arbitration in employment agreements

On March 13, 2006, Maryland's Court of Appeals affirmed its holdings that arbitration provisions in employment agreements are enforceable, but are subject to the basic principles of contract law. In Holloman v. Circuit City Stores, the Court affirmed and clarified its decision in Cheek from 2003. Restating previous holdings that jury waiver is implicit in an agreement to arbitrate, and noting the right of review, time to seek legal counsel, and three day rescission period, the Court also found that jury trial rights had been waived.

In Cheek, the Court held that an arbitration provision was invalid as a matter of law. Because only the employer could change the terms of the agreement, including the arbitration provision, there was a lack of consideration and the provision was illusory. The Court held that the employment of Cheek, the employee, was not sufficient consideration, in and of itself, to support the arbitration provision. In Holloman, the Court found that the arbitration provision referenced in an employment application, and part of the company's policies and procedures distributed to employees was valid. The company did reserve the right to change the terms of its policies, including the arbitration provision, but only once per year, and after notice to employees.

Comparing its more recent decision in Holloman to that from Cheek, the Court noted that the Cheek agreement could be changed at any time, and without notice, while the agreement from the Holloman case could not: "our reasoning in Cheek indicates that the arbitration agreement at issue in that case was unenforceable because United Healthcare was not bound to arbitrate and could "opt out" of the arbitration process at anytime, even after the process was initiated-- or even completed". Holloman at page 12. "Unlike United Healthcare in Cheek, Circuit City does not have unfettered discretion to alter or rescind the arbitration agreement without notice or consent". Holloman at page 12.

If an employer has employee agreements, including employee contracts, policies and procedures manuals, or company handbooks, it should clearly indicate that the terms, including arbitration provision, are binding for a period of time and cannot be changed without notice. Guided by the Holloman decision, an arbitration provision can be valid where it is binding "for at least thirty days and for the entire year prior to the day upon which the agreement may be modified" as such constitutes sufficient consideration.

Many employee handbooks contain language to protect the employer by allowing it to change the terms within, at any time, with or without notice. This is usually included to (1) help protect the employer against the argument that the company policies amount to a contract binding the employer, and (2) provide the greatest level of employer flexibility. A blanket statement in a handbook which allows for a unilateral change of its terms will create what the courts have declared to be an illusory promise to arbitrate claims, thereby rendering it void.

In order to protect an employer from having a court declare an arbitration clause in an employment handbook void, it must not have a blanket provision stating that the employer can change the policies at its sole discretion at any time. If a handbook does include such a provision and the employer feels it is important to be able to change the handbook at any time, a disclaimer should be added. The disclaimer should exclude waivers of rights by the employee, including a trial or jury trial right, implied in arbitration provisions, for example “the policies in this Employment Handbook are subject to change at any time, with or without advance notice, except any provision contained herein regarding arbitration. If any provision in this handbook is ambiguous as to whether the arbitration policy may be changed at any time, this provision excluding arbitration shall take precedence over any contradictory section.” While the courts have not specifically stated that such a provision will protect an employer against a finding that an arbitration clause is void, the courts have suggested that such language will prevent such a finding.

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