A California Court of Appeal determined that an arbitration agreement in an employee handbook was valid even though the employer could change the handbook at its discretion.

A bail bond investigator for California Surety Investigations signed an acknowledgement that she received an employee handbook which included an agreement to arbitrate all employment-related disputes. When Valerie Serpa later filed suit alleging employment discrimination, wrongful termination and sexual harassment, the company moved to compel arbitration.

Finding that the agreement lacked mutuality, i.e., it only bound employees and not the company, the trial court denied the employer’s motion. But the appellate court disagreed.

The arbitration agreement was not invalid simply because the employer had the right unilaterally to alter the agreement, the court said. The implied covenant of good faith and fair dealing operated as a “fundamental limit” on the employer’s ability to amend the agreement, and therefore it was neither illusory nor unconscionable for lack of mutuality, the panel concluded.

Although plaintiff Serpa argued that the obligation to arbitrate was one-sided, “the agreement’s incorporation of the arbitration policy in the employee handbook salvages the agreement by establishing an unmistakable mutual obligation on the part of [the employer and the employee] to arbitrate ‘any dispute’ arising out of her employment,” the court said.

The court found no merit in the employee’s contention that the obligation to arbitrate was illusory because of the employer’s right to unilaterally change the policy in the handbook at any time. The application of the implied covenant operates to “rein in and restrict” the employer’s otherwise unilateral rights, even where the agreement is silent as to whether notice must be provided. “[I]mplied in the unilateral right to modify is the accompanying obligation to do so upon reasonable and fair notice,” the court said.

The arbitration agreement was not perfect, however. The court found that the attorney fee provision – which required each party to bear its own attorney fees – deprived Serpa of available statutory remedies, like reimbursement of attorneys’ fees, should she prevail on her state law claims under the California Fair Employment and Housing Act. As the offending provision was “plainly collateral” to the main purpose of the contract, the court severed it, leaving the remainder of the arbitration agreement intact.

To read the decision in Serpa v. California Surety Investigations, click here.

Why it matters: The court’s decision strengthens the ability of California employers to enforce binding arbitration agreements with employees. Even though the court found that the arbitration agreement at issue was procedurally unconscionable, the panel determined that it was not substantively unconscionable and, therefore, was enforceable because the obligation to arbitrate was mutual and the implied covenant of good faith and fair dealing restricts the employer’s right to modify the agreement unilaterally.