The Michigan Supreme Court recently held in Rayford v. American House Roseville I LLC that courts must review for reasonableness provisions in employment contracts that limit the amount of time within which an employee may bring a lawsuit arising out of her employment. For two decades, Michigan courts routinely enforced such “contractually shortened limitations periods” without scrutiny. The Michigan Supreme Court’s adoption of the reasonableness test marks a return to a more employee-protective approach.
Background
In Michigan, employment claims often have a three-year statute of limitations, meaning that an employee who wishes to bring such a claim must file a lawsuit within three years. Recognizing that period allows for evidence to be lost, memories to fade and witnesses to become unavailable, many employers and their employees agree to shorten the default limitations period by contract — often to six months or a year. Michigan courts routinely enforced six-month contractual limitations periods for more than 20 years.
In Rayford, the plaintiff signed an employee handbook acknowledgment when she started her job agreeing that she would bring any claim arising out of her employment within 180 days. Nearly three years after her employment was terminated, the plaintiff filed a lawsuit against her former employer. The trial court dismissed the lawsuit based on the contractually shortened limitations period, and the Michigan Court of Appeals affirmed.
The Supreme Court’s Analysis
The Michigan Supreme Court disagreed. The Court specifically focused on employment contracts presented to employees as nonnegotiable, standard-form contracts, which are commonly known as adhesion contracts. It explained that adhesion contracts require closer review in the employment context because, in its view, the economic pressure to obtain a job is acute for most prospective employees, leaving them without a realistic option to reject an employer’s terms.
Shortened limitations periods in adhesive employment contracts, the Court explained, deserve “close judicial scrutiny.” In practice, this means two things.
First, a court must review a shortened limitations periods in adhesive employment contracts for reasonableness. The reasonableness test involves the following factors:
1. Did the claimant have sufficient opportunity to investigate and file an action? The Court emphasized that “‘what is possible’ is not the inquiry.” Rather, the question is whether the shortened period is reasonable under the circumstances of the particular case.
2. Is the period so short as to effectively eliminate the plaintiff’s right to bring a claim?
3. Does the shortened limitations period allow the plaintiff enough time to assess his damages?
Second, even if a court concludes that a contractually shortened limitations period is reasonable, the court must nonetheless consider whether the provision is unconscionable. Unconscionability requires consideration of both (1) whether the employee lacked meaningful choice and (2) whether the challenged provision shocks the conscience. What this means in practice remains to be seen.
Takeaways for Employers
- Contractually shortened limitations periods in adhesive employment contracts are not automatically enforceable.
- Courts must now scrutinize such provisions for reasonableness and unconscionability under the circumstances of the case.
- If a court holds that a shortened limitations period is unreasonable or unconscionable, the statutory limitations period will apply.
- Expect employee-plaintiffs to argue that other provisions in adhesive employment contracts are enforceable only if they are reasonable. While the Michigan Supreme Court explicitly left for another day the question whether its holding extends beyond contractually shortened limitations periods, it noted that the Michigan Court of Appeals has applied the reasonableness standard to other types of provisions.
