Michigan Supreme Court Reverses Course to Hold that “Adhesion” Employment Contracts Containing Shortened Limitations Periods Are Subject to Heightened Judicial Scrutiny

In Rayford v. American House Roseville I, LLC, the Michigan high court overruled two decades of precedent to “restore” the analytical framework in Camelot Excavating Co. Inc. v. St. Paul Fire & Marine Ins. Co., 410 Mich. 118, 703 N.W.2d 275 (1981), and Herweyer v. Clark Hwy. Servs., Inc., 455 Mich. 14, 564 N.W.2d 857 (1997), as the correct method for reviewing contractually shortened limitations periods contained in boilerplate employment agreements.

Under Camelot and Herweyer, courts must now first determine whether the employment agreement at issue is “adhesive” and, if so, whether the provision shortening the limitations period is “reasonable.” The Court made clear that virtually all employment agreements will be considered “adhesive” – noting that only the most highly sought after candidates have any bargaining power and most employees’ only options are to sign the agreement as presented by the employer or to lose the job. So most employment agreements will be subject to close judicial scrutiny to determine the reasonableness of any shortened limitations provisions.

“Reasonableness” under the Court’s restored precedent means:

• the claimant has sufficient opportunity to investigate and file an action,
• the time is not so short as to work a practical abrogation of the right of action, and
• the action is not barred before the loss or damage can be ascertained.

In addition to being reasonable, the Court emphasized that shortened limitations provisions in adhesion employment contracts are subject to contract defenses, particularly unconscionability. Unconscionability in contracts includes those agreements with “an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.” Nearly all contracts of adhesion will fit that definition.

At issue in Rayford was a six-month limitations period in an acknowledgement of an employee handbook. After determining that the acknowledgement was an adhesive contract, the Court concluded that the record below was insufficiently developed to determine whether it was reasonable or unconscionable. Although the Court expressly did not hold that a six-month limitations period is either unreasonable or unconscionable, that is the clear implication from the Court’s analysis.

In Rayford, the Michigan Supreme Court has explicitly overruled the Court of Appeals’ decisions in Clark v. DaimlerChrysler Corp., 268 Mich. App. 138, 706 N.W.2d 471 (2005), and Timko v. Oakwood Custom Coating Inc., 244 Mich. App. 234, 625 N.W.2d 101 (2001), and their progeny.

Employers that regularly use standard employment agreements with shortened limitations periods should review those agreements for reasonableness and conscionability, and be prepared not to rely on the limitations period as a defense.

While we continue to track the ongoing legal developments, The Rhoades McKee Human Resource and Employment Law Team is here to help employers navigate compliance with the new changes.