In recent years, an increasing number of employers have entered into agreements to arbitrate workplace disputes with their employees. Although public policy favors arbitration, and the courts have enforced valid arbitration agreements, employers must be careful to draft contracts that are enforceable. A recent case decided by a federal court in Kansas illustrates this point. Phox v. Atriums Management Company, Inc., 2002 U.S. Dist. LEXIS 21933 (D. Kansas Nov. 7, 2002).

Atriums Management Company operates a residential care facility for the elderly in Johnson County, Kansas. When LaRhonda Phox was hired to work as a dining room manager for Atriums in April 2001, she was asked to sign a one-page "Employee Acknowledgement Form," which was removed from the Employee Handbook that was given to her. In pertinent part, the Form had standard language indicating that the Handbook was not a contract and that Atriums could change policies in the Handbook. Atriums allegedly did not give Phox a chance to read the Handbook before she signed the Form. Rather, she purportedly was told to take the Handbook home and read it.

The Handbook contained a policy entitled "Binding Arbitration of Disputes and Claims" pursuant to which Atriums and the employee agreed to arbitrate all workplace disputes on a final and binding basis. The Handbook also provided that Atriums could modify this agreement at any time prior to the initiation of any proceeding initiated under the arbitration policy.

On February 28, 2002, Phox filed a race discrimination claim against Atriums under Title VII of the Civil Rights Act of 1964. Atriums filed a motion to compel arbitration of the dispute under the Federal Arbitration Act (the "FAA"). The FAA provides for the enforcement of valid arbitration agreements. The Court noted that federal policy favors arbitrations, and that the courts are required to "rigorously enforce" arbitration agreements. Although there is a presumption in favor of arbitrability, that presumption "falls away when the dispute . . . is whether the parties have a valid and enforceable arbitration agreement in the first place."

To be enforceable under the FAA, the arbitration agreement must be contained in "an agreement in writing." Phox argued that because the Handbook did not bind Atriums, any contract based on the Handbook is "illusory." The Court agreed. It noted that the Handbook and the Form expressly provided that the Handbook was not a contract. Moreover, in various sections of the Handbook, Atriums reserved the right to modify or cancel provisions of the Handbook in its sole discretion. According to the Court, "[b]ased on these disclaimers, the arbitration clause in the [Handbook] is not part of an enforceable contract or agreement."

The Court further found that Atriums' agreement to arbitrate was illusory. Although Atriums argued that it did not exercise its right to cancel the arbitration agreement, it could have done so before Phox ever filed her claim. The Court reasoned that Atrium's "after-the-fact decision not to exercise this right does not alter the illusory nature of its original promise to arbitrate."

The Court also rejected Atriums' argument that its promise to employ Phox was valid consideration for the arbitration agreement, observing that because she was an at-will employee, she could have been terminated "the very minute she signed the [F]orm." Finally, the Court found that there was no meeting of the minds on the alleged agreement to arbitrate because Phox allegedly signed the Form before she was ever aware of the agreement to arbitrate.

There were obviously two ways that Atriums could have avoided the Court's ruling. One would have been to remove all language from the Handbook that disclaimed the existence of any contract and that gave Atriums the unilateral right to modify or cancel the agreement. However, this would have conferred contractual rights on Phox under the Handbook that Atriums did not intend to provide. The second and more preferable way of curing the problem would have been for Atriums to ask Phox to sign a separate agreement to arbitrate that did not contain any contract disclaimers or unilateral modification rights. By adopting this approach, Atriums would have been able to disclaim that the Handbook created any contractual rights, preserved the at-will employment relationship, and required Phox to arbitrate her discrimination claim.