In your contracts, don’t set the bar too high for things you might want to do later

Tilly’s, Inc. and World of Jeans & Tops, Inc. (“Tilly’s”) had an employee sign an employment agreement (the “2001 employment agreement”) containing an arbitration provision. That agreement included a carve-out for statutory claims (which thus could be brought in court, not in arbitration).

Importantly, the 2001 employment agreement also stated that any modifications to the agreement would need the signatures of three executives: The company’s president; senior vice president; and director of human resources.

In 2005, the company had its employees sign an acknowledgement of receipt of an employee handbook containing another arbitration provision — which didn’t contain the carve-out for statutory claims. The acknowledgement, though, didn’t contain the three executive signatures needed to modify the 2001 employment agreement.

An employee brought a class action against the company, alleging  wage-and-hour violations. The company sought to compel arbitration. A California appeals court affirmed a trial court’s ruling that:

• the employee’s wage-and-hour claims were within the carve-out of statutory claims in the 2001 employment agreement’s arbitration provisions; and
• the carve-out wasn’t negated by the 2005 acknowledgement, because the latter didn’t contain the required three executive signatures;
• thus, Tilly’s was not entitled to compel arbitration of the employee’s claims.

See Rebolledo v. Tilly’s, Inc., No. G048625 (Cal. App. 4th Div. July 8, 2014) (unpublished; affirming denial of motion to compel arbitration).

Lessons

Many contracting parties include clauses requiring amendments to be in writing. (NOTE: Courts won’t always give effect to such clauses; see the commentary to the Common Draft amendments-in-writing clause.)

And just as Tilly’s did, employers often include stringent amendment requirements in their employment agreements to try to preclude employees from claiming that their managers made a special deal for them that modified the employment agreement.

In this case, though, Tilly’s seems to have been hoist by its own petard: Its employment-agreement form stated that the company president and two other senior executives needed to sign any modification to the employment agreement — and then the company didn’t get those executives to sign a broadened arbitration agreement.

As a result, the company now seems to be facing class-action litigation, whereas it presumably had thought that it would be arbitrating any such cases, not litigating them.

Tilly’s might have been better off if its employment agreement had stated that:

• any amendment to the contract form as generally used by the company would not require any company signature, and if signed by the employee, would supersede any prior agreement; and
• any individualized amendment to a particular employee’s existing agreement would require multiple signatures.

(Hat tip: Charles Rumbaugh.)