by Timothy K. Baldwin
Continued employment is sufficient to enforce a new arbitration agreement between an employer and an employee, a judge in the U.S. District Court for the District of Rhode Island recently ruled, disagreeing with another Rhode Island district judge. Because an arbitration agreement’s validity is a question of state contract law, the issue of enforceability based on continued employment is one the Rhode Island Supreme Court ultimately must decide.
New employer attempts to compel arbitration
The employee worked for a medical center for many years until 2014, when another company purchased the facility. As part of the transition, the new company conducted a brief meeting with the employee and three coworkers and explained that he would become its employee. In addition, he was told he would have to sign three stand-alone documents as a condition of employment: an offer letter, an arbitration agreement, and a code of business ethics. His offer letter reserved the company’s right to “change the terms of [his] employment . . . at any time.”
The arbitration agreement, which the employee signed, stated that “any controversy, claim or dispute between [him] and [the new employer] . . . relating to or arising out of [his] employment or the cessation of that employment will be submitted to final and binding arbitration.” The agreement covered “all employment[-]related claims[,] including, but not limited to, claims for unpaid wages, breach of contracts, torts [personal injuries], violation of public policy, discrimination, harassment, or any other employment-related claim under any state or federal statutes or laws relating to an employee’s relationship with his/her employer.” Under the agreement, the employee and the employer each gave up “all rights to a trial by jury.”
In 2015, the employee sued his employer in the Rhode Island federal district court for alleged violations of the Age Discrimination in Employment Act (ADEA), Title VII of the Civil Rights Act of 1964, the Rhode Island Fair Employment Practices Act, and the Rhode Island Civil Rights Act.
Judge finds mutual agreement to arbitrate
After the employee filed suit, the employer moved to compel him to litigate the dispute in private arbitration under the terms of the agreement. The employee resisted arbitration, first arguing that the employer had reserved the right in his offer letter to change the terms of his employment at any time. As a result, any purported agreement to arbitrate was unenforceable.
The court began its analysis by recognizing that the Federal Arbitration Act (FAA) requires the enforcement of valid arbitration agreements and any doubts about the scope of arbitrable issues should be resolved in favor of arbitration. The court explained that the existence of a valid arbitration agreement is a question of state contract law that requires mutual agreement in the form of “legal consideration.”
Legal consideration is a legal term of art that means each side to a contract gets something from the other side in return for their contractual promise. Under Rhode Island law, legal consideration is “illusory” (meaning a contract is unenforceable) when one party to a contract makes a promise that it can later retract at its sole discretion. The employee argued that because the employer’s offer letter allowed it to change his terms of employment in the future, the arbitration agreement he signed was “illusory” and not enforceable.
The district court rejected the employee’s argument and, in doing so, distinguished this case from another case recently decided by a different Rhode Island federal district court judge. The judge in this case rested his decision on the fact that the offer letter and the arbitration agreement were separate documents, each signed by the employee. The judge concluded that if the arbitration agreement had been in an employment handbook that reserved the employer’s right to alter the terms of employment, without a separate page for the arbitration agreement or without requiring a separate signature, the agreement to arbitration would have been illusory. But because the employer’s offer letter was separate from the arbitration agreement, its reservation of the right to alter the terms of employment in the offer letter didn’t invalidate the arbitration agreement, and the employee’s legal claims must proceed to arbitration.
In reaching that conclusion, the judge declined to follow the reasoning of the other district judge, who construed an offer letter and arbitration agreement together and ruled that the agreement was illusory.
Continued employment is enough to require arbitration
The judge also ruled that even if the arbitration agreement and the offer letter were read together, the agreement was still enforceable because the employee’s continued employment was sufficient “legal consideration” (in other words, the employee got something in return for signing the arbitration agreement). The judge relied heavily on Oken v. National Chain Company, a 1981 case in which the Rhode Island Supreme Court ruled that continued employment is sufficient legal consideration to enforce a contractual agreement.
The judge explained that when an employer offers a new agreement, an employee has the choice of continuing to work under the employer’s new terms or leaving the company. In this case, the employee’s promise to continue to work in exchange for the employer’s promise to pay him for the work was enough legal consideration to make the new arbitration agreement enforceable. Britto v. St. Joseph Health Services.
Rhode Island has two sitting federal district court judges. One has ruled that an arbitration agreement and an offer letter should be read together (even if they’re separate documents) and that continued employment is not sufficient to enforce the arbitration agreement. The other has ruled the opposite, saying that arbitration agreements and offer letters should be read separately and that continued employment is enough to enforce the agreements. These split decisions obviously lead to uncertainty for employers.
Ultimately, the Rhode Island Supreme Court will decide the issue. It’s unclear when the court will take up the question, but the uncertainty could continue for several years. In the meantime, new arbitration agreements with employees are more likely to survive judicial scrutiny and be upheld if they are (1) stand-alone documents requiring the employee’s signature and (2) separate from an offer letter or an employee handbook.
To discuss this topic further, please contact Tim directly at email@example.com or 401-270-0330.