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Fourth Circuit Invalidates Arbitration Agreement Contained in Employee Handbook

    Client Alerts
  • April 29, 2022

Some employers use mandatory arbitration agreements with employees, intended to have disputes heard through private arbitration instead of the court system. Earlier this week, the Fourth Circuit Court of Appeals (which includes North Carolina, South Carolina, and Virginia) concluded that an arbitration agreement contained in the company’s employee handbook did not prevent a lawsuit by those employees.

In Coady v. Nationwide Motor Sales Corp., former employees sued, alleging unpaid commissions. The employer moved to compel arbitration based on a provision in the signed acknowledgement of receipt of the employee handbook. The plaintiffs argued that the arbitration clause was invalid because that same written acknowledgement gave the employer the ability to amend the handbook’s provisions without advance notice or consent. The district court agreed, denying the motion to compel arbitration.

The Fourth Circuit agreed, finding the arbitration agreement to be illusory and invalid based on the amendment language. The court rejected the employer’s argument that the amendment provision did not apply to the arbitration agreement. This case was decided under Maryland law, and the Fourth Circuit did not opine on whether an arbitration agreement in an employee handbook could ever be enforced. However, this case demonstrates the perils for employers that fail to use standalone, mutual arbitration agreements that do not appear to give the employer the ability to change the arbitration rules following signature.