U.S. Supreme Court Verdict: Arbitration and Class Action Waiver Agreements in the Workplace Are Valid
The U.S. Supreme Court recently issued its long-awaited decision on the validity of class action waivers in employment arbitration agreements. In Epic Systems Corp. v. Lewis, a 5-4 decision, the Supreme Court held that such waivers are valid and must be enforced as written. In reaching this conclusion, the Court rejected the position that class action waivers are invalid because they violate an employee’s right to engage in protected concerted activity under the National Labor Relations Act (NLRA).
The core highlights of the Supreme Court’s decision are as follows:
- The Federal Arbitration Act (FAA) favors the enforcement of employment agreements, and courts are required to enforce terms of employment agreements under the FAA. This includes terms requiring individualized arbitration.
- Although the FAA has a savings clause allowing courts to invalidate employment agreements “upon such grounds as exist at law or in equity for the revocation of any contract,” this applies only to contract defenses such as “fraud, duress or unconscionability.”
- Congress never intended for the NLRA to override the FAA. Moreover, class actions are not the type of concerted activities protected by Section 7 of the NLRA. Instead, the NLRA focuses on the right to organize and bargain collectively. It does not address the matters of arbitration or the right to bring class or collective actions.
- The National Labor Relations Board’s (NLRB's) contrary view was not entitled to deference because it involved interpretation of the FAA, which falls outside the NLRB's statutory authority.
In an opinion speaking for the four dissenting judges, Judge Ruth Bader Ginsburg criticized the majority’s decision as “egregiously wrong,” and as sanctioning employee oppression:
“[T]he edict that employees with wage and hours claims may seek relief only one-by-one does not come from Congress. It is the result of take-it-or-leave-it labor contracts harking back to the type called “yellow dog,” and of the readiness of this Court to enforce those unbargained-for agreements. The FAA demands no such suppression of the right of workers to take concerted action for their ‘mutual aid or protection.’”
The Supreme Court's decision resolves the uncertainty that prevailed over the enforceability of class action waivers in employment arbitration agreements. In 2012, the NLRB held that class action waivers in the employment context violate the NLRA because they bar employees from exercising their right to act concertedly for mutual aid and protection under Section 7 of the statute. This set off a series of splits in authority in which some of the federal circuit courts of appeal affirmed the NLRB's reasoning and other circuits rejected it. The Seventh Circuit, sitting in Chicago, was one of the circuits siding with the NLRB's view. The Supreme Court's decision settles that split, holding that these agreements are valid and enforceable.
What This Means for Employers
In various articles, we have reported on the benefits that employment arbitration agreements with class action waivers can provide for employers. (See "Employee Arbitration and Class Action Waiver Agreements Help Limit Employer Liability and Lower Costs" and "Class Action Waivers: Should Employers Be Adopting Them in Their Employment Agreements?")
The following scenario is typical of what a class action waiver agreement is designed to avoid:
An employee or a couple of employees file suit claiming they were not paid overtime pay either because they were misclassified as exempt employees or independent contractors, or because they worked certain pre- or post-shift time or off-the-clock time that was not counted as time worked in computing their overtime compensation. The lawyer bringing the lawsuit styles it as not only being brought on behalf of the named plaintiff(s) but also on behalf of "all other similarly situated employees" and seeks collective action or class certification from the court. This creates great pressure on the employer: the larger the number of employees in the sought-after class, the greater potential claimed owed wages. The plaintiffs' lawyer will also seek liquidated damages (which is an additional amount equal to the amount of wages claimed), plus payment of his or her attorneys' fees. In this way, the potential exposure can easily reach well into the six-figure range or beyond. The risks and potential costs of litigation often force the employer into an expensive settlement – even if the employer may not have engaged in wrongdoing.
By implementing employment arbitration agreements with class action waivers, the employer avoids this situation. The Supreme Court's decision validating such agreements will likely result in more employers taking advantage of this mechanism. If an employer already utilizes arbitration agreements, adding a class action waiver provision should not entail much cost or expense, while providing the employer with a great benefit.
In making the decision whether to adopt such agreements, employers should nonetheless weigh certain considerations. The advantages are manifest: privacy, expedition, closure on the merits of the dispute, control over the process, avoidance of potential jury trials and, of course, lower cost and exposure.
But there are some other factors to be considered as well:
- Class and Collective Action Waivers May Not Be a Panacea: Arbitration awards are very difficult to appeal, so an employer may be stuck with an adverse award. That may then be used as a stepping stone for the plaintiff's attorney to file similar arbitration claims for other employees.
- Consider Whether to Make Only Some Types of Workplace Disputes Subject to Arbitration: The Supreme Court's decision involved a wage and hour claim of the type that is well-suited for class or collective action. But other types of workplace disputes may not be. For example, sexual harassment claims are typically highly individualized and may not be suitable for class treatment. Also, the #MeToo movement has mobilized against employers that compel the use of private methods such as arbitration to resolve harassment claims. Given that harassment claims are usually brought by single plaintiffs who do not seek class action treatment and are typically individualized cases, employers may want to consider whether to include such types of disputes in their arbitration agreements.
- Consider How Employees May React to Implementing Arbitration/Class Waiver Agreements: If imposing a company-wide arbitration/class action waiver requirement may be negatively received, then consider whether or when to implement, perhaps in conjunction with a bonus rollout or an annual salary review.
- Arbitration/Class Action Waiver Agreements Must Still Meet Certain Standards: While arbitration/class action waiver agreements will be enforceable generally, employees can still attempt to void them by claiming unconscionability, fraud or duress. Also, if an arbitration agreement does not include certain procedural protections, or if the remedies allowable are less than those provided by statute (e.g., the employees cannot recover liquidated damages or attorneys' fees), then a court may not enforce it. An employer should therefore work with experienced employment law counsel to prepare or review its arbitration/class waiver agreement.
The Supreme Court majority began and ended its decision by observing that it was simply interpreting the FAA as written and that if Congress felt it needed to amend the FAA to bar arbitration/class action waiver employment agreements, it can do so. Given the current political makeup of Congress, that is not likely to happen in the near future, but it is always a possibility with a future Congress. For now, however, the debate is over.