In Mendoza v. Trans Valley Transport, the California Court of Appeal held that an arbitration agreement contained in an employee handbook was unenforceable by the employer because the parties did not enter into a binding agreement to arbitrate.  The appellate court’s analysis in Mendoza illustrates some problems for employers who place arbitration agreements in employee handbooks instead of having a standalone arbitration agreement.

Placing arbitration agreements within employee handbooks creates greater risk that the agreements may be found unenforceable. 

Employee handbooks typically contain language that the handbooks do not create a contract with the employee and that the employer can revise the employee handbook at any time.

In Mendoza, the court noted that other courts have not enforced arbitration agreements in employee handbooks when other language in the handbooks or acknowledgement forms indicate that (1) the handbook was intended to be informational, not contractual, (2) could be changed by the employer at any time, or (3) did not create a contract of employment.  Oftentimes employee handbooks contain this type of language to avoid creating employment actual or implied in fact contractual obligations arising from the employee handbook.  But as the court in Mendoza explained, employers need to be careful to clearly set out the arbitration agreement if contained in the handbook, and explain that the arbitration agreement is a binding contract.

Therefore, it is best to use standalone arbitration agreements with employees.  Another benefit of using a standalone arbitration agreement is that only the agreement has to be entered into the public record to enforce the agreement, instead of placing the entire employee handbook into the record.  However, if employers do place arbitration agreements in their employee handbook, it must be carefully reviewed to ensure that no other language within the handbook contradicts the employer’s attempt to create a binding contract to arbitrate all employment claims.

Employers must make arbitration agreements clear, should provide signature lines for the employee and employer, and follow-up to ensure that the parties signed the agreement. 

In Mendoza, the employer did not ask the employee to sign the arbitration agreement, or initial that portion of the employee handbook that contained the arbitration agreement. The employer instead relied upon the employee’s signature on the employee acknowledgement of the handbook.  This, however, was not enough for the court to uphold the agreement because the acknowledgment forms signed by the plaintiff did not mention the arbitration policy or incorporate it by reference.  Moreover, the employer’s arbitration policy was “not highlighted in a table of contents and did not stand out from other sections of the Handbook”, and the employer’s language that the arbitration agreement was a “condition of employment” was not explicit enough and failed to state that plaintiff “would be deemed to have consented to arbitration by accepting the employment if he failed to sign an arbitration agreement.”  Having a signature line for the employee and the employer on an arbitration agreement, and ensuring that both the employee and employer signed the agreement will alleviate any potential argument that there was not mutual consent.  As the court explained, “…there must be more than a boilerplate arbitration clause buried in a lengthy employee handbook….”

The use of electronic signatures are fine, as it is often easier to document and follow-up to ensure the parties signed the agreement.  However, the issue will come down to employers making sure that there is clear evidence that the employee and the employer agreed to arbitration.

Lessons from the Mendoza case:

The issues raised in Mendoza highlight some best practices for California employers when implementing arbitration agreements:

  1. Avoid placing arbitration agreements into employee handbooks.
  2. Set forth arbitration agreements in stand alone documents with signature lines for the employee and the employer.
  3. Ensure that the employee and a representative from the employer sign the document.
  4. Electronic signatures are acceptable, but employers must review how the electronic signature is recorded and ensure this could be documented in a manner that will be upheld in court when enforcing the arbitration agreement.
  5. If the arbitration agreement is voluntary, implement a system to track who has signed and not signed the agreement.
  6. Implement a system to securely store signed arbitration agreements. This can be a manual or electronic system, but it needs to be audited routinely to ensure that the agreements are store in a usable format, are backed up, and the appropriate people have access to these saved documents.