In Sparks v. Vista Del Mar Child Services, the California Court of Appeal held that the mere existence of an arbitration clause in a lengthy employee handbook — without more — does not create a binding, enforceable arbitration agreement between employer and employee.
In Sparks, the employer utilized a lengthy employee handbook that contained a “dispute resolution policy.” That dispute resolution policy required all employees to agree to arbitrate all employment disputes. All employees received the employee handbook and had to sign an acknowledgment form indicating that they had “read and understood” all provisions of the handbook. The employee handbook also contained the standard at-will language about how the handbook did not create an enforceable contract and how the employer could modify the terms of the handbook at any time, with or without notice.
When the employee later complained about the employer’s compensation practices, the employee was terminated. The employee then filed a lawsuit against the employer for wrongful termination. The employer responded by filing a petition to compel arbitration. The employer’s argument was that, because the employee admitted to receiving the handbook with the arbitration provision in it, and because he had signed an acknowledgment agreeing to be bound by all of the handbook’s terms, the employee’s claims were required to be arbitrated, not litigated.
The trial court denied the employer’s petition to compel arbitration on the grounds that no valid arbitration contract existed. The trial court reasoned that “the mere acknowledgement of receipt of the Handbook was insufficient to create an enforceable arbitration agreement.” The employer then appealed.
The Sparks Court began its analysis by reiterating that arbitration agreements are contracts. To be enforceable, these contracts must reveal a “knowing agreement” to be bound by the terms of the contract. In the present case, the Court ruled, the employer never specifically called the employee’s attention to the arbitration provision. Instead, that provision was tucked away inside a “lengthy” employee handbook that specifically stated that nothing in the handbook created an enforceable contract. Moreover, the handbook acknowledgment that the employee signed did not state anywhere that the employee agreed to be bound by the terms of the handbook; it said only that the employee had read the handbook and understood that he would be “governed” by its contents. Under these circumstances, the Sparks Court agreed with the trial court and concluded that no binding contract existed.
In addition, the Sparks Court ruled that the employer’s arbitration policy was also unconscionable. Thus, even if the arbitration agreement was a valid contract, the Sparks Court ruled that it could not be enforced. The employer’s arbitration provision was procedurally unconscionable, according to the Court, because the employer never provided the employee with a copy of the arbitration rule-s that were mentioned in the policy. The arbitration provision was substantively unconscionable because it allowed employees no right to discovery during the arbitration process.
The Court’s opinion is available here.
Impact on California Employers
The Sparks case is a good reminder that employment arbitration agreements should be separate, stand-alone agreements between employer and employee. These separate agreements should be supported by sufficient consideration — that is, the employer should give something “of value” to the employee in exchange for the employee’s agreement to be bound by the terms of the arbitration provision. Finally, this separate stand-alone agreement should be even-handed and not unconscionable under the California Supreme Court’s decision in Armendariz v. Foundation Health Psychare Services, Inc., 24 Cal. 4th 83 (2000) and the case law interpreting it.