Fifth Circuit Finds Arbitration Clause in Employee Handbook Was “Illusory”

Though federal policy strongly favors arbitration, there are limits. (See our other arbitration posts here.) Last month, in Carey v. 24 Hour Fitness USA Inc., the Fifth Circuit held that an employer’s arbitration clause was invalid because it was illusory.

The employee filed a class action under the Fair Labor Standards Act on behalf of employees who were allegedly denied overtime pay. The employer tried to compel arbitration by relying on an arbitration provision in the employee handbook. The handbook, however, also stated that the employer “has the right to revise, delete and add to the employee handbook.” The district court found that the arbitration provision was illusory under Texas law. The Fifth Circuit affirmed on the grounds that, under Texas law, arbitration agreements are invalid unless they specify that unilateral changes made by an employer will not have a retroactive effect against the employee. The Court noted:

Where one party to an arbitration agreement seeks to invoke arbitration to settle a dispute, if the other party can suddenly change the terms of the agreement to avoid arbitration, then the agreement was illusory from the outset.

This decision demonstrates another line of attack plaintiffs can use to attempt to defeat arbitration agreements under state law. But will this stand up in light of the Supreme Court’s recent arbitration rulings that favor federal policy over state law theories, such as AT&T v. Concepion? Let us know your thoughts in the comments, and stay tuned.

About Bose McKinney & Evans LLP

Bose McKinney & Evans LLP is a business law firm, headquartered in Indianapolis, Indiana, serving both publicly held and privately held businesses, governmental entities and high-growth industries. Our clients include Fortune 100 companies, international manufacturers, national and regional financial institutions, agribusinesses, sports teams, university-incubated start-ups, media, utilities, cities and schools, to name a few. We strive to build strong relationships with our clients as key business advisors, to exceed expectations in the quality of our work, to be knowledgeable about our clients’ businesses and sectors, to be responsive to service needs and to continually seek to improve the delivery of client services. Our ultimate focus is on our clients.
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