Employment and Labor Law Alert
January 7, 2016
A Nov. 24, 2015, decision from the U.S. Court of Appeals for the Fourth Circuit, which has jurisdiction over the Carolinas, about an arbitration provision included in an employee handbook serves as a warning to employers to review employee handbooks and agreements for the new year.
In Lorenzo v. Prime Communications, L.P., the Fourth Circuit considered whether an employee could sue her former employer in court for alleged wage and hour violations even though she had signed an employee handbook that contained a provision requiring employment disputes to be resolved out of court.
The court concluded she could because the acknowledgement form contained disclaimers that stated, for example, the handbook “is not a contract of employment.”
The case arose when Rose Lorenzo filed suit under the Fair Labor Standards Act (FLSA) and the North Carolina Wage and Hour Act alleging that her former employer, Prime Communications, miscalculated her commissions and bonuses and did not pay her earned overtime pay. Prime filed a motion to compel arbitration because the handbook committed “all employment issues” to an internal dispute resolution process first, then to mediation, and finally to arbitration. The handbook also stated that employees “waived all rights to bring a lawsuit and to a jury trial regarding any dispute,” including claims under the FLSA.
Lorenzo admittedly received the handbook and continued to work for Prime. But the acknowledgement that Lorenzo signed confirming receipt of the handbook emphasized that “no provision [of the handbook] should be construed to create any bindery [sic] promises or contractual obligations between the Company and the employees” and that the handbook provisions “are guidelines only and are in no way to be interpreted as a contract.”
The federal district court concluded the handbook arbitration provision was not enforceable because the acknowledgement form made it clear the handbook did not create binding contractual commitments. As a result, it denied Prime’s motion to compel arbitration and allowed Lorenzo’s wage and hour lawsuit to continue.
On appeal, Prime argued the arbitration provision was itself binding and severable from the rest of the handbook, regardless of whether the handbook “as a whole was an employment contract.”
In its decision, the Fourth Circuit noted that per the Federal Arbitration Act, “arbitration is a matter of contract.” So it applied North Carolina contract law to determine if the parties entered into a contract to resolve employment disputes through arbitration. It concluded the express disclaimers in the acknowledgement form nullified any implied consent that might have been created by Lorenzo’s receipt of the handbook and continued employment with Prime.
Accordingly, the Fourth Circuit affirmed the district court’s order denying the motion to compel arbitration.
The purpose of a handbook disclaimer is to avoid breach of contract lawsuits over provisions in the handbook. In the Prime case, however, the disclaimer had the unintended consequence of subjecting the company to FLSA litigation. So at the start of a new year, employers should resolve to know what is in their employee handbooks, what their handbook disclaimers say, and what is in stand-alone policies and agreements with employees. Employers should consider setting out arbitration agreements, as well as non-disclosure, inventions, and some other agreements, in separate documents that meet legal requirements so they can be enforced if necessary.
David Dubberly is a certified employment and labor law specialist with Nexsen Pruet, LLC. He can be reached at firstname.lastname@example.org.