The Myth of the Contract

By Julia

            A quote in a recent SF Chronicle article about Instagram’s policy change caught our attention:  “‘The law maintains a fiction that consumers really have consented to endless reams of’ legal language, [University of Richmond in Virginia law professor Jim Gibson] says. ‘This fiction allows companies . . .  to unilaterally dictate terms to consumers without facing the economic consequences.’”  As employment attorneys, we do a surprising amount of thinking about contracts.  Most of that thinking is about contracts of adhesion --- ones our clients would be surprised to know they have purportedly agreed to, and ones that bind them in unfortunate ways.

           American workers would be surprised at the number of contracts they have supposedly signed over the years.  Although most are incessantly reminded by their employers that their contract is “at will”—meaning they can be fired at any time for any reason (other than an unlawful reason such as discrimination), when they attempt to sue, participate in a class action, or pursue benefits to which they are entitled, they are suddenly confronted with an “agreement” they either never signed or do not remember signing.  Courts are increasingly willing to honor these purported contracts, even though they lack many of the qualities of typical contracts and skirt the requirements we all learned in Contract Law in our first semesters of law school.[1]

            So many employees do not know what they are signing.  These purported “contracts” are presented to employees (often as mandatory) in their job application or in their first days on the job.  Typically, employees come in, sign a series of documents, including expected ones like W-4s and I-9s for taxes.  In that large packet is an acknowledgement of receipt of the employee handbook, which contains a mandatory arbitration clause that prohibits class actions.  Or they sign up for disability benefits but do not understand that if they ever become disabled, they are entitled to only 2 years of benefits if the disability is based on a mental illness.  Or that their benefits—which they expect to be 60% of their salary—are offset by any Social Security Disability benefits.  Or they sign a severance agreement not realizing that they are waiving their right to sue if their disability insurance benefits are unreasonably denied to them.

            There are multiple problems from a contract law perspective.

            First, most are contracts of adhesion.  That means the party with superior bargaining power drafted them—often with the help of an experienced lawyer—and employees are not free to negotiate the terms.  Yes, they can walk away from a job if they do not like the terms, or they can risk their job (in this bad economy) by pushing back and trying to negotiate.  For obvious reasons, few do.  Furthermore, with so many employers using the same adhesive language, there are few real options.  For low-skilled and low-wage workers, who are so often the ones who need legal protections, the choices are even more limited.  Yet even courts that acknowledge the adhesive nature of the contracts will often enforce them anyway.

           Second, Contract law is premised on a “meeting of the minds.”  Unfortunately, as employment law has developed, that premise has been completely forgotten.  There can be no meeting of the minds if the employee does not understand, have access to, or become aware of the terms. 

           Finally, some of these supposed contracts are never even signed.  Merely by continuing to work, employees have been deemed to be bound by oppressive terms.

           The end result is that people release claims they don’t know they have or don’t understand.  Employees release methods of recovery—which in effect exonerates employers for violations of the law when those methods are really the only viable ones.  People don’t have the benefits they think they have.  And, as Professor Gibson notes with respect to consumers, the fiction that employees have consented permits companies “to unilaterally dictate terms” to employees “without facing the economic consequences.”

[1] Nothing in this blog posting is intended to be legal advice or legal argument regarding any specific case.