Employee handbooks present a double-edged sword. On the one hand, they serve a useful purpose in advising employees of key policies and procedures so they know what is expected of them. On the other hand, if they’re improperly drafted, they can be construed as binding contracts that, if not followed to the letter by the employer, can serve as the basis for a breach-of-contract claim. Employers can avoid the risk of their employee handbook being considered a contract by expressly disclaiming that it constitutes a binding contract between you and the employee. Read on to learn how a good handbook disclaimer saved one employer from a potentially expensive breach-of-contract claim.
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Ron Compton filed a lawsuit against Rent-A-Center in Oklahoma state court claiming he was a non-exempt employee who was entitled to overtime and that Rent-A-Center failed to pay him 600 hours of overtime during his tenure with the company. His complaint specifically stated he was entitled to “unpaid overtime hours required by federal law to be compensated at one-and-a-half times his regular rate of pay.”
Based on the charges, Rent-A- Center requested that the case be relocated from state court to a federal district court because Compton’s claims for overtime pay implicated the federal Fair Labor Standards Act (FLSA). FLSA cases can be filed in either state or federal court, but if the employee files the case in state court, the employer has the right to have it moved to federal court, which is generally considered a better venue for the employer. The federal court agreed with Rent-A-Center and moved the case to federal court.
After discovery (the pretrial exchange of evidence), Compton asked the judge to move the case back to state court on the grounds that his complaint was really based on state-law contract claims for “unpaid overtime work.” The district court denied his request because his complaint required the resolution of substantial federal questions based on the FLSA and didn’t contain a state-law claim for breach of contract. Compton then sought leave to amend his complaint to assert a state-law contract claim based on alleged statements in Rent-A-Center’s employee handbook.
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Lower court dismisses Compton’s claims
The district court dismissed Compton’s case in its entirety in favor of Rent-A-Center. The court reasoned that more than three and a half years had lapsed after Compton’s employment before he filed his complaint. Under the FLSA, employees must file their claims within three years from the date the unpaid overtime was worked. Thus, Compton’s FLSA claims were time-barred. In addition, the court found that he was exempt from the Act’s overtime requirement and therefore not entitled to overtime pay under the statute.
Turning to Compton’s alleged state-law claim, the court denied him leave to amend his complaint, finding that the request for leave to amend was untimely and that the amendment was prejudicial to Rent-A-Center and futile. In doing so, it affirmed its earlier holding that Compton’s complaint didn’t allege a state-law claim for breach of contract. The court also noted that even assuming a state-law claim was alleged in the complaint and the parties had executed a contract obligation that exceeded the FLSA’s requirements, the undisputed facts established that no contract was formed.
The district court specifically rejected Compton’s claim that Rent-A- Center’s employee handbook and timecards created a contract, noting that every version of the handbook contained an express disclaimer that stated the handbook was not a contract. Finally, the court noted that Oklahoma has a three-year statute of limitations for assertion of implied contract claims. Thus, like the FLSA claim, any implied contract claim Compton may have based on the handbook was time-barred.
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Tenth Circuit agrees: Compton has no claim
On appeal to the Tenth Circuit Court of Appeals, Compton abandoned his federal claim and argued that Rent-A-Center’s employee handbook and timecards formed an explicit written employment contract. If the court accepted that argument, he would be entitled to assert a state-law claim for breach of contract that would be subject to Oklahoma’s five-year statute of limitations for written contracts.
Compton asserted that the district court failed to recognize that he had pleaded in his original complaint a breach of contract claim that was independent of his FLSA claim. He also contended that the district court failed to recognize the written employment contract and erred when it denied his request for leave to amend his complaint.
The Tenth Circuit rejected Compton’s appeal, reasoning that his complaint supported the district court’s conclusion that he sought recovery for unpaid overtime compensation under the FLSA, not under state law. Further, it was only after he sought to avoid the FLSA statute of limitations that he attempted to recast his allegations as a state-law breach of contract claim, which was a litigation tactic the lower court properly rejected.
Next, the Tenth Circuit analyzed the district court’s decision to deny Compton leave to amend his complaint to include a state-law claim for breach of contract. The court recognized that leave to amend should be freely given in the absence of any evidence of undue delay, bad faith, or dilatory motive. But in this case, the district court denied Compton leave to amend, in part because it viewed the amendment as futile. Therefore, the Tenth Circuit reviewed the language of the employee handbook Compton relied on as well as his timecards.
Noting that under Oklahoma law “an employer may deny or disclaim any intent to make the provisions of an employee handbook part of the employment relationship as long as the disclaimer is clear,” the Tenth Circuit affirmed the district court’s decision and held that the handbook, by its bold express disclaimers, clearly disclaimed any intent to create an employment contract. Thus, any amended complaint was futile because Compton couldn’t prove under any set of facts that he had a contract with the employer based on the employee handbook. Compton v. Rent-A-Center, Inc. (10th Cir., No. 08-6264, Oct. 20, 2009).
The Tenth Circuit’s decision shows the importance of clear and conspicuous disclaimers in employee handbooks. Employers should make sure not only that every version of their employee handbooks have an appropriate disclaimer stating that the handbook is not a contract, express or implied, but also that each employee executes an acknowledgment that he received the handbook and agrees that the handbook is not intended to be a contract. Many employers also include at-will language in their disclaimers and acknowledgment forms, making it clear that either the employer or the employee can terminate the employment relationship with or without notice or cause.