A Texas appeals court recently let Texas employers know when it comes to mandatory arbitration agreements, they had better comply with the legal requirements of their own contracts if they want to enforce them.
Contracts must be validly executed to be enforceable. When contract terms are disputed, Texas courts examine the written terms to determine the parties’ intent. If the contract language is unambiguous, it will be interpreted according to its plain or common meaning.
And when the plain meaning of the contract language indicates that both the employer and the employee must sign an arbitration agreement, the employer’s failure to sign renders the agreement unenforceable. Here’s what Texas employers need to know about arbitration agreements, presented by the labor and employment group at Fee, Smith & Sharp LLP.
Why Employers Want to Arbitrate Employee Disputes
Arbitration is a method of dispute resolution that many employers require employees to agree to as a condition of employment. Settling employee disputes with arbitration has several advantages for employers:
- Non-public proceeding
- Faster process
- Less formal
- Lower costs to resolve
- Lower payouts
- Binding and non-appealable
Employers can include the arbitration agreement in the employment contract or present it to an employee as a separate agreement.
The Employer Signature Issue with the Arbitration Agreement in Mertens v. Benelux
In Mertens v. Benelux (Mertens), a group of employees filed a lawsuit against their employer, Benelux, for violations of the Fair Labor Standards Act (FLSA). Benelux had required employees to sign an arbitration agreement and sought to enforce it and arbitrate the disputes.
Benelux’s arbitration agreement included separate signature boxes for each employee and a company representative. One employee mistakenly signed both boxes. A company representative missed the error and failed to sign the agreement, assuming at a glance that another representative had already signed it.
The employee argued that the absence of an employer’s signature rendered the agreement unenforceable. Benelux argued the signature was not necessary because there was ample evidence of the company’s intention to enter into the arbitration agreement.
The district court found that the arbitration agreement contained clear language requiring both the employee and the company to sign it, and Benelux’s failure to sign rendered it unenforceable against the employee. The Fifth Circuit Court of Appeals affirmed.
Texas Contract Law and the Language of the Arbitration Agreement in Mertens
Under Texas law, a signature on a contract is not required to bind the parties UNLESS there is evidence of the intent to require that all parties must sign as a condition precedent to enforcing the contract. When contract terms make it clear that a signature is required, failing to sign invalidates the contract.
The relevant language of the Benelux arbitration agreement reads as follows:
“By signing this arbitration agreement, Employee and the Club’s Representative represent that:
- They have fully read …
- They have been provided a copy …
- They understand the terms …”
Right below the agreed representations were two separately labeled signature boxes, one for the club representative and one for the employee.
The appeals court compared other Texas cases addressing similar issues regarding an employer’s need to sign an agreement. It concluded the use of the word ‘they’ preceding each agreed-upon representation indicated that both the employee’s and the employer’s signatures were necessary to create an enforceable contract.
Benelux argued that requiring an employer’s signature is a condition precedent to contract enforceability only if the contract contains specific language stating that both parties must sign, or that the contract is invalid unless both sign.
However, the law is established in Texas. Specific conditional phrases are not necessary to create a condition precedent to contract formation. Benelux also argued that the parties’ conduct demonstrated an intention to be bound by the agreement.
The court side-stepped the issue of whether the parties’ conduct could have ratified an otherwise unenforceable contract, focusing only on the fact that the arbitration agreement had not been properly executed and was therefore invalid as to the affected employee.
What the Ruling in Mertens Means for Texas Employers
The Mertens ruling means a few things for Texas employers. A primary lesson is that employers need policies and procedures to detect oversights and avoid costly errors in employee relations.
The following takeaways from Mertens can also help employers better manage employee dispute resolution.
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- A Valid Contract is Required to Enforce an Arbitration Agreement
If your arbitration agreement requires the signatures of both a company representative and an employee to be valid, ensure a company representative signs each document.
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- Administrative Error is Not an Excuse for Failing to Execute a Contract
Details are important. Initiate a review process that ensures every required detail has been attended to so unpleasant surprises can be avoided.
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- Arbitration Agreements Don’t Have to Require an Employer Signature
There are ways to modify existing contracts and reduce the risk of errors that could affect enforceability. Employer signatures are only required if the agreement itself requires them. It may be worth considering redrafting contracts to minimize potential enforceability problems.
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- Contract Formalities Govern the Enforceability of an Arbitration Agreement
Despite the historical presumption in favor of arbitration, the parties’ intentions will not render an otherwise invalid arbitration agreement enforceable. A valid contract must exist before the arbitration agreement can be enforced.
Arbitration Laws are Evolving as Public Sentiment Changes
While once revered as a less costly litigation alternative that achieved faster resolution, arbitration is falling out of favor to the extent it is perceived as unfairly limiting the rights of those bringing claims. Because mandatory arbitration clauses limit workers’ access to the court system, they have come under increasing fire.
In 2022, the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (EFAA) amended the Federal Arbitration Act (FAA) to invalidate pre-dispute arbitration agreements and class action waivers for sexual assault and sexual harassment claims.
Another bill, often introduced and currently before Congress, is the Forced Arbitration Injustice Repeal Act. If passed, it would invalidate a pre-dispute arbitration agreement if it requires arbitration of an employment, consumer, antitrust, or civil rights dispute.
Fee, Smith & Sharp LLP Helps Employers Manage Employee Relations
With the increasing prospect of more litigation and less arbitration, the labor and employment attorneys at Fee, Smith & Sharp LLP focus on equipping our employer clients with the tools they need to avoid disputes and minimize employment litigation. When disputes arise, we provide an aggressive defense and seek early resolution to reduce business interruptions.
