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Arbitration agreement in employee
handbook is unenforceable

Coady v. Nationwide Motor Sales (4th Cir 04/25/2022)
Sent to Custom Alerts™ subscribers on 04/27/2022

Employees signed a receipt acknowledging an employee handbook, and the handbook contained an arbitration agreement.

When the employees sued, alleging fraudulent payment practices, the employer moved to compel arbitration. The trial court denied the motion, and the 4th Circuit affirmed.

Why? Because the promise to arbitrate was "illusory" under Maryland law. Why illusory? Because the employer retained the right to change, abolish, or modify the handbook.

Under Maryland law, a promise to arbitrate is illusory—and thus cannot constitute the consideration necessary to support a binding contract—if the employer reserves the right to alter, amend, modify, or revoke the arbitration agreement at any time with or without notice.

The receipt the employees signed stated: "I further understand that the employer has the right, from time to time, to make and enforce new policies or procedures and to enforce, change, abolish or modify existing policies, procedures or benefits applicable to employees as it may deem necessary with or without notice."

A big issue in the case was whether the receipt was actually part of the arbitration agreement (as distinguished from being part of the whole handbook). This is because Maryland courts do not look beyond an arbitration provision “into the underlying employment agreement to determine whether consideration exists to support an agreement to arbitrate.”

The court noted that the arbitration agreement incorporates the receipt. Also, the receipt specifically mentions the arbitration agreement. Therefore, the receipt is part of the arbitration agreement itself.

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