Fifth Circuit Overrules Arbitration Agreement

In Carey v. 24 Hour Fitness, USA, Inc., No. 10-20945, (5th Cir. 1/25/12),we have another caes regarding an arbitration clause in an employee handbook.  But, this time, the court of appeals found that the arbitration clause was not binding. The cause prohibited entering into any class actions based on the Fair Labor Standards act.  The employee, John Carey, however, did enter into an FLSA class action. 24 Hour Fitness sought to stay the class action and force arbitration.  The district court denied the stay and found the arbitration agreement to be illusory.  The Fifth Circuit sustained the lower court.

Under Texas contract law, an agreement which allows one party to unilaterally make changes to the agreement retroactively is considered illusory.  Such an agreement is not a genuine agreement.  In this case, the Fifth Circuit found that 24 Hour Fitness retained the right to amend the employee handbook, including the arbitration clause, at any time with no limit.  The court fiound the 24 Hour Fitness arbitration agreement different from that in other cases, in which the handbook was subject to change, but not if any complaint had already been lodged. 

The arbitration agreement in the 24 Hour Fitness case allowed the employer to "revise, delete, and add to" the employee handbook at any time.  There was no limit on its ability to do so.  the agreement, thus, applied to the employee but allowed the employer to slip out of it if it chose.  This failure to make the agreement truly binding rendered the agreement "illusory,: said the court.

24 Hour Fitness argued that it did not have an express ability to make changes retroactively.  But, noted the court, Texas law presumes retroactive application if the agreement is silent on the subject.  See the opinion here

The Fifth Circuit has overruled similar arguments made here by the plaintiff in other cases.  It seems that the law of arbitration agreements is still evolving. 

This decision also reflects the challenge of using employee handbooks.  Employee handbooks benefit employers because they prescribe procedures for counseling or terminating employees.  Such procedures make it far easier for employers to win claims for unemployment benefits.  But, employee handbooks can become contracts - meaning the failure to follow discipline procedures in the book may give rise to breach of contract claims by an employee.  The employer then responds with clauses providing that the employee handbook is not a contract and can be changed at any time.  So, how does the employer insert an arbitration clause without making the rest of the handbook a contract?  This decision suggests that the employer should at least make it clear that it can change the handbook, but such changes would not apply to any pending claims of discrimination or FLSA violations. 

But, in the end, it is hard to eat your cake and eat it too.  There are limits to how much we can squeeze into any one contract. 

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Comments (2) Read through and enter the discussion with the form at the end
Maurice Peugh - February 4, 2012 12:50 PM

Good news. Now, someone just needs to outlaw binding arbitration since everyone knows that arbitrators favor whoever sends them the most business.

tom crane - February 6, 2012 10:30 AM

It is unfortunate but true that arbitration favors the employers - since employers do more arbitrations than any one employee.

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