January 15, 2015 Top Story

Employee's Arbitration Agreement Void Due to Lack of Consideration

Continued at-will employment and revocable promise to arbitrate insufficient consideration

Joseph Callanan

Employers cannot enforce employment arbitration agreements that merely promise continued at-will employment and include a unilateral right to modify. Baker v. Bristol Care, Inc. The Supreme Court of Missouri held as invalid an employment arbitration agreement for lack of consideration in a 4–3 decision.

Employee’s Arbitration Agreement Invalid

The employer required the plaintiff-employee—upon promotion from hourly employee to salaried management—to sign contemporaneously separate employment and arbitration agreements. After termination, the employee filed a class action lawsuit seeking compensation for the employer’s alleged failure to pay overtime. The employer sought to compel arbitration, which the trial court denied “because there was no consideration to create a valid arbitration agreement.”

The employer appealed the trial court’s decision to the Supreme Court of Missouri. There, the employer argued that the arbitrator in the first instance should decide whether the agreement was enforceable. While the agreement stated the arbitrator had exclusive authority to determine disputes “relating to applicability and enforceability,” the court found that the employee’s “claim raises a contract formation issue that is subject to resolution by Missouri state courts.”

The employer also argued that the agreement to arbitrate all disputes, for which the employer agreed to pay, constituted sufficient consideration. The appellate court rejected this argument to satisfy consideration to support the agreement because the employer’s “alleged mutual promise to arbitrate is conditioned on [the employer’s] unilateral ‘right to amend, modify or revoke’” the agreement upon 30 days’ notice. This unilateral right made the appellate court concerned that if the employer found the arbitration process unfavorable, the employer could provide notice to the employee that within days the employer would no longer be bound by the arbitrator’s decision.

State Law—Not Federal—Controls Contract Formation Analysis

While federal law preempts state laws that would invalidate arbitration agreements on most public policy grounds, the Federal Arbitration Act “looks to state law to decide the threshold questions of contract formation.” Missouri law previously held continued at-will employment was insufficient consideration to compel an employee to arbitration. Since the “employer still can terminate the employee immediately for any reason,” the appellate court concluded that the agreement was bereft of consideration because “the employer makes no legally enforceable promise to do or refrain from doing anything it is not already entitled to do.”

The dissent found, on the other hand, consideration relying upon three “relevant principle[s] of consideration.” These bases included “bargained-for exchange” of promises, no judicial assessment of adequacy, and separate consideration is unnecessary for every promise within a collection of promises. Some of the mutual promises the dissent cited included the employer’s promise to pay a salary, pay for vacation days, and allow the employee to stay at the employer’s assisted living facility.

Section leaders disagree on the central holding of the court and find the dissent more convincing. The court’s “holding that continued at-will employment does not constitute valid consideration to create a valid arbitration agreement is, in my view, not persuasive,” says Brian Koji, Tampa, FL, cochair of the ABA Section of Litigation’s Employment & Labor Relations Law Committee. “The idea that continued at-will employment, even with a higher salary and benefits, is not sufficient consideration for an arbitration clause in the employment agreement is unusual,” states Mitchell L. Marinello, Chicago, cochair of Section of Litigation’s Alternative Dispute Resolution Committee. “Particularly when, as here, the employer obligates itself to give the employee five days’ notice of termination or to provide the employee with five days’ severance pay,” adds Marinello.

Several Section leaders found the court’s rationale “unpersuasive” or “disagreed” with it. “I view the dissent’s rationale as more persuasive. The dissent points out that the employer indeed agreed to a number of commitments,” adds Koji. “I believe that [the majority’s] view of consideration is not only unusual, but Orwellian,” says Marinello. “Here, there is also an overtime class action in play which I think helped the court with its decision,” concludes Louis F. Burke, New York, cochair of the Section’s Class Actions & Derivative Suits Committee.

What Types of Consideration May Work

Since the court found continued at-will employment and a unilateral agreement to arbitrate insufficient consideration, Section leaders suggest several provisions Missouri employers should include in future arbitration agreements. “As to the type of consideration that would have deemed sufficient, the court does not give a clear answer. However, the court certainly implies that other typical forms of consideration would suffice, such as a monetary payment in exchange for agreeing to the arbitration clause,” states Koji. Thus, a nominal payment, ostensibly a “signing bonus,” may be enough to enforce future Missouri arbitration agreements.

“If the employer had obligated itself to arbitrate employment disputes under the contract and did not retain the right retroactively to amend or rescind the arbitration agreement,” then “the arbitration agreement would have been enforced,” suggests Marinello. “The fact the contract could be changed killed the consideration,” adds Burke.

Modifying the employer’s right to amend the arbitration agreement until the arbitration process is underway may be enough to allay the majority’s concerns. “Missouri employers would be well-served to provide a specific benefit or pay in exchange for the agreement to arbitrate such that the consideration was tied to something more than continued at-will employment,” concludes Koji.

Joseph Callanan is an associate for Litigation News.

Keywords: arbitration agreement, employment law, consideration, Federal Arbitration Act, ADR

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