Promises, Promises in Arbitration of Employment Disputes
ABSTRACT: Under Missouri law, an arbitration agreement that reserves for the employer the unilateral right to modify the agreement lacks consideration, and is unenforceable.
Employers frequently adopt arbitration programs for resolving disputes with their employees. Arbitration is generally cost-effective and efficient compared with litigation in court. Benefits include reduced discovery costs, shorter time to resolution, and arbitrators willing to make compromise decisions, potentially reducing an employer’s overall exposure. But there has also been a corresponding increase in arbitration-related litigation in recent years, and much of it relates to employers’ desire to retain the right to modify their arbitration programs.
In Harris v. Volt Mgmt. Corp., the Missouri Court of Appeals for the Eastern District reaffirmed that under Missouri law, an arbitration agreement that vests in one party the unfettered right to modify the arbitration program lacks consideration and will not be enforced. The Court affirmed a decision of the circuit court overruling an employer’s motion to compel arbitration, finding that the arbitration agreement lacked consideration because Volt’s promise to arbitrate disputes with its employees was illusory. Language in the arbitration agreement, which reserved for Volt the unfettered right to unilaterally modify the terms of the arbitration program, was not a promise at all. As a result, the circuit court would not compel the employee to arbitrate her claims, instead her lawsuit to proceed.
As a matter of law, an arbitrator’s jurisdiction over a dispute requires that a valid contract exists between the parties to refer their disputes to an arbitrator for resolution. Because an arbitration agreement is a contract, the essential elements of a valid contract – offer, acceptance, and consideration – must be present. In the employment context, arbitration agreements are generally bilateral. Consideration for the agreement is a mutual exchange of promises between the employer and the employee to arbitrate any disputes that arise from the employment relationship. In a bilateral agreement, mutuality requires that both the employer and employee agree to refer their disputes to arbitration.
The circuit court generally has exclusive authority to decide whether a dispute is procedurally arbitrable, that is, whether a valid arbitration agreement exists. Challenges to the existence of a valid arbitration agreement may include an employee’s claims to have never signed the agreement, duress, unconsionability, or any other challenges to contract formation. However, parties may agree to delegate this authority to the arbitrator, as long as the delegation is “clear and unambiguous.” This “delegation” clause is a separate agreement within the arbitration agreement, which must also be supported by consideration. Often, parties will incorporate by reference the rules of the American Arbitration Association (“AAA”) into the arbitration agreement. Section 6.a. of the AAA Employment Rules states that “The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” [EmploymentRules_Web_2.pdf (adr.org)]. Missouri courts have held that incorporation of this rule into an arbitration agreement can be a valid delegation.
In Harris, an employee was terminated, allegedly in retaliation for her seeking orders of protection against her co-workers and for other illegal reasons. Harris subsequently filed a lawsuit asserting claims of wrongful termination, retaliation, and related claims. After the suit was filed, the defendants moved to compel arbitration, asserting that the parties had agreed to arbitrate any disputes arising from the employment relationship. The defendants also claimed that the parties had delegated arbitrability issues to the arbitrator.
The arbitration agreement at issue was contained in an “Employee Guide” provided to all new employees at hiring. The Employee Guide provided employees with “general information about Volt’s rules, policies, plans, procedures and practices concerning the terms and conditions” of their employment. The Employee Guide contained a section entitled “Travel expense policy | Arbitration,” which stated that “[a]ny dispute, controversy or claim which arises out of, involves, affects or relates in any way to your employment” must be referred to arbitration. The arbitration would be conducted “in accordance with the applicable rules of the American Arbitration Association (AAA).” The next page of the Employee Guide contained an “Acknowledgement,” which employees were required to sign, that contained the following crucial provision: “Volt has the right to change, interpret or cancel any of its rules, policies, benefits, procedures or practices at Volt’s discretion, upon reasonable notice where practicable. […] Except as otherwise stated, I agree to arbitrate any and all disputes related to my employment or assignment(s) with Volt, as discussed in this Guide.”
The Court held that the employer retained the right to modify any part of the Employee Guide, including the arbitration agreement and the delegation clause. Because that provision purported to give the employer an “unfettered right” to unilaterally modify the arbitration provision at any time, Volt’s promise to arbitrate was illusory. The Court echoed concerns from prior cases that an employer could sense that an arbitration case was going badly, revoke their arbitration agreement, and get a second bite at the apple in court.
The Court also rejected Volt’s argument that Harris did not separately attack the delegation clause. Generally, a party opposing arbitration must challenge the delegation clause and the arbitration agreement separately. Here, however, the Court permitted Harris to challenge both the delegation clause and the arbitration agreement together, as the challenge to both agreements were premised on the same argument; and Harris explained in her brief that the delegation clause lacked consideration for the same reason as the entire arbitration agreement.
- Arbitration is a matter of contract. Missouri courts have long emphasized that employers should not treat an arbitration agreement as a policy to be unilaterally imposed on employees.
- When drafting arbitration agreements, employers should use care to ensure that modification rights apply only prospectively. The courts have recognized that "limiting an employer's unilateral right to amend an arbitration agreement to amendments that [(1)] are prospective in application and [(2)] about which employees have been afforded reasonable advance notice may prevent an employer's mutual promise from being rendered illusory." Patrick v. Altria Grp. Distribution Co., 570 S.W.3d 138, 144 (Mo. App. 2019).