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On November 24, 2015, the U.S. Court of Appeals for the Fourth Circuit refused to enforce an arbitration clause in an employee handbook on the grounds that the employee never agreed to be contractually bound by the handbook, and that a court can only compel arbitration where it is satisfied that the parties have agreed to arbitrate. This case, Lorenzo v. Prime Communications, L.P., should serve as a warning to employers to review their employee handbooks to be sure that provisions, like an arbitration clause, will be enforceable.

Rose Lorenzo filed a wage and hour claim against her former employer, Prime Communications, L.P. (“Prime”), under the Fair Labor Standards Act in the U.S. District Court for the Eastern District of North Carolina. Lorenzo alleged that Prime unlawfully failed to pay her for overtime wages even though she consistently worked more than 40 hours per week, and that Prime incorrectly calculated her commissions. Relying on an arbitration provision in its employee handbook, Prime filed a motion to compel Lorenzo to arbitrate her claims. The District Court denied Prime’s motion. The court held that Lorenzo’s receipt of the handbook and continued work for Prime was insufficient to establish her agreement to arbitrate. The District Court subsequently denied Prime’s motion to reconsider and refused to compel arbitration, even after Prime submitted a copy of the handbook acknowledgement form signed by Lorenzo, because the acknowledgement form expressly stated that the handbook did not create a contract.

Affirming the District Court’s decision, the Fourth Circuit Court of Appeals held that an agreement to arbitrate did not exist between the parties. The Fourth Circuit rejected Prime’s argument that the U.S. Supreme Court has consistently favored arbitration as a matter of federal policy under the Federal Arbitration Act. Instead, the court opined that arbitration is a matter of contract, and that parties are bound to arbitrate only where an agreement to arbitrate exists. And, whether a contract to arbitrate exists between parties is exclusively a matter of state contract law.

While the Fourth Circuit held that, under North Carolina law, the District Court erred in holding that Lorenzo’s continued work for Prime after receiving the handbook did not create implied assent to its terms, the Fourth Circuit held that the term in the acknowledgment form, stating that the employee handbook did not constitute a contract, invalidated any implied agreement to arbitrate that may have existed. In essence, Prime’s attempt to limit potential contractual liability based on its employee handbook invalidated the company’s attempt to rely on the handbook to create a binding duty to arbitrate.

The Fourth Circuit’s decision demonstrates that employers face significant risk in their ability to enforce an arbitration provision found in an employee handbook, where the handbook also contains a contract disclaimer and the employer has the unilateral right to modify the handbook. Lorenzo is consistent with the recent decisions from other Circuit Courts, including the Fifth and Ninth Circuit Courts of Appeals, that have held that an employer’s authority to unilaterally modify the terms of an employee handbook in its sole discretion, may negate the existence of a valid contractual agreement. As such, employers may find themselves unable to enforce arbitration provisions in an employee handbook where the employer has the right to unilaterally modify the handbook. Employers should carefully review their employee handbooks to ensure that provisions, such as an arbitration clause, are not at odds with other provisions in the handbooks.