Modification to elimination? Don’t modify your arbitration agreement out of existence

Employers using agreements that require employees to arbitrate employment law claims should take note of a decision by the U.S. 4th Circuit Court of Appeals (the federal appellate court with jurisdiction over North Carolina, South Carolina, and West Virginia), which raises concerns about the validity of arbitration agreements that contain modification clauses.

Facts and findings

Former employees sued Nationwide Motor Sales Corporation and its owners in federal district court, alleging it engaged in fraudulent payment practices that reduced their sales commissions and final paychecks. Nationwide asked the court to compel arbitration and dismiss or stay (suspend) the employees’ lawsuit, arguing the claims were subject to arbitration because of an agreement contained in its employee handbook.

In support of its request, Nationwide produced the employee handbook. The first four paragraphs of the arbitration agreement stated its intention to arbitrate employment-related claims and specified the rules and procedures that would apply.

The fifth and final paragraph referenced an acknowledgement receipt, which included a modification clause giving Nationwide “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.” Thus, the arbitration agreement contained in the company's employee handbook, by virtue of the modification clause contained in the acknowledgement receipt, allowed it to change the agreement at its discretion.