Why it matters

A California appellate court recently provided employers with a lesson in how not to structure an arbitration agreement in an employee handbook. January Esparza was given a handbook when she began working at Sand & Sea, Inc., that contained an arbitration provision. The handbook featured a welcome letter on the first page that stated: "[T]his handbook is not intended to be a contract (express or implied), nor is it intended to otherwise create any legally enforceable obligations on the part of the Company or its employees." Although Esparza signed a form acknowledging she received the handbook that referenced the arbitration provision, the form did not state that she agreed to the arbitration provision and recognized that she had not read the handbook when she signed the form. Under these circumstances, the court found the arbitration provision did not create an enforceable agreement to arbitrate, affirming denial of the employer's motion to compel arbitration.

Detailed discussion

January Esparza began working at Shore Hotel, owned by Sand & Sea, Inc., in November 2012. On her first day of work, Esparza was given an employee handbook. The first page contained a welcome letter that included the statement: "Employees should understand, however, that this handbook is not intended to be a contract (express or implied), nor is it intended to otherwise create any legally enforceable obligations on the part of the Company or its employees."

Pages three and four of the handbook included a section titled "Agreement to Arbitrate." Unlike the rest of the handbook, this section was printed all in capital letters and written in the first person from the employee's perspective.

The last two pages of the 52-page handbook consisted of identical copies of a policy acknowledgment, one labeled for the employee to keep and the other to give to the employer. Among other statements, the policy acknowledgment said: "Neither this manual nor its contents constitute, in whole or in part, either an express or implied contract of employment with Shore Hotel or any employee."

In addition, the acknowledgment form stated: "I also acknowledge that I am expected to have read the Employee Handbook in its entirety no longer than one week after receiving it." Esparza signed the acknowledgment form on her first day of work.

Her employment ended the following August, and in 2014, she filed suit against Shore Hotel alleging sexual harassment, sex discrimination, wrongful termination, and intentional infliction of emotional distress. The defendant moved to compel arbitration, relying on the agreement.

Esparza objected, arguing that her signature on the acknowledgment form was not an assent to arbitration but simply indicated that she was to have read the handbook within a week. The hotel countered that because Esparza had a week to review the handbook, she had the opportunity to accept employment subject to the handbook terms or seek employment elsewhere.

The appellate court disagreed. "There is a strong public policy favoring contractual arbitration, but that policy does not extend to parties who have not agreed to arbitrate," the court wrote, ruling that the employee handbook did not create a mutual agreement to arbitrate.

To begin with, the handbook itself indicated to the reader that it was not intended to establish an agreement, explicitly stating in the welcome letter that "this handbook is not intended to be a contract." "This statement undermines defendants' argument that the handbook and its arbitration provision actually were intended to create a legally enforceable obligation to arbitrate," the panel said.

The defendants' argument that the welcome letter language was intended to clarify that the handbook did not create an employment contract did not persuade the court. "[T]he language of the welcome letter was extremely broad, stating that the handbook 'is not intended to … create any legally enforceable obligations.' Defendants now ask us to find that the arbitration provision did create a legally enforceable obligation, despite the express language to the contrary. We decline to do so."

"Here, the reasonable interpretation of the welcome letter is that it meant exactly what it said—that the handbook was not intended to create 'any legally enforceable obligation,' including a legally enforceable obligation to arbitrate," the court said.

Further, the policy acknowledgment form was "merely informational," and explicitly recognized that Esparza had not yet read the handbook. "We have no basis to assume that Esparza agreed to be bound by something she had not read," the panel wrote, refusing to accept the employer's contention that her continued work for the company signaled her implied assent.

"[T]he welcome letter declared that the handbook did not 'create any legally enforceable obligations,' the policy acknowledgement said the handbook provided 'general information' about employer policies, and there was no stated requirement that the employee agree to any of these policies," the court wrote. "These facts do not support a conclusion that the parties mutually assented to be bound by the arbitration provision in the handbook."

To read the decision in Esparza v. Sand & Sea, Inc., click here.