Client Alert: Supreme Court Enforces Class Action Waivers in Employment Arbitration Agreements

Client Alerts Labor & Employment

Employers should consider adopting or revising employment arbitration agreements in light of the Supreme Court’s recent decision upholding class action waivers.

In a landmark decision, the U.S. Supreme Court recently held that class action waivers contained in employment arbitration agreements are enforceable under the Federal Arbitration Act (“FAA”) and National Labor Relations Act (“NLRA”).  The Supreme Court’s decision in Epic Systems Corp. v. Lewis resolves a contentious issue that resulted in significant litigation over the course of several years.  The decision also removes a major source of uncertainty for employers seeking to avoid the risks associated with class and collective actions.

Background

Pursuant to the FAA, employers can lawfully require employees to pursue employment-related claims in arbitration, rather than state or federal court.  Many employment arbitration agreements contain class action waivers, which require employees to arbitrate any employment-related claims individually, rather than as part of a class or collective action.  In 2012, however, the National Labor Relations Board (“NLRB”) held that class action waivers violate the NLRA.  Specifically, in D.R. Horton, the NLRB ruled that class action waivers violate workers’ rights to engage in “protected, concerted activities” pursuant to Section 7 of the NLRA.

Following the NLRB’s decision in D.R. Horton, numerous federal appellate courts rejected the NLRB’s ruling.  Between 2013 and 2015, the United States Circuit Courts for the Fifth, Second, and Eighth Circuits refused to follow the NLRB’s ruling and enforced arbitration agreements containing class action waivers.  Despite these adverse rulings, the NLRB refused to alter its position and continued to pursue enforcement actions against employers.  Adding to this uncertainty, in 2016, the Seventh Circuit became the first federal appellate court to side with the NLRB, followed by the Sixth and Ninth Circuits.  Ultimately, the Supreme Court granted certiorari and consolidated three cases related to the issue of class action waivers, including Epic Systems v. Lewis. 

Holding

On May 21, 2018, the Supreme Court rejected the NLRB’s position and held that class action waivers contained in employment arbitration agreements are enforceable under both the FAA and the NLRA.  Writing for the 5-4 majority, Justice Gorsuch reasoned that the FAA mandates that arbitration agreements are to be enforced according to their terms, and that no provision of the NLRA overrides that mandate. 

The majority also held that although Section 7 the NLRA provides that workers have the right to engage in “protected, concerted activities,” these “Section 7 rights” do not include the right to participate in class or collective actions.  Specifically, Justice Gorsuch reasoned that “Section 7 focuses on the right to organize unions and bargain collectively…But it does not express approval or disapproval of arbitration.”  The majority also pointed out that when Congress passed the NLRA in 1935, the modern procedures for asserting class or collective actions did not exist, which further undermines the argument that Section 7 encompasses the right to participate in such lawsuits.

In her dissent, Justice Ginsburg adopted the NLRB’s position and reasoned that participation in class or collective actions constitutes “concerted” activity under Section 7 of the NLRA.  Justice Ginsburg noted that many employment-related claims (particularly wage and hour claims), are low-value claims when brought individually, and that by restricting the ability of workers to participate in class action lawsuits, class action waivers diminish the likelihood that such workplace violations will be redressed.  The minority also appealed directly to Congress, stating, “Congressional correction of the court’s elevation of the FAA over workers’ rights to act in concert is urgently in order.”

Should Employers Adopt Arbitration Agreements?

Following the Supreme Court’s decision in Epic Systems, employers should carefully consider whether they should implement a mandatory arbitration policy.  Although an arbitration program might not be the right choice for every employer, all businesses should at least consider the costs and benefits of arbitration to make an informed decision.

Benefits

First, although the costs associated with arbitration vary significantly from case to case, arbitration is frequently less expensive than litigation, particularly if a matter is litigated through trial.  Second, arbitrations are typically confidential (unlike court proceedings), which may benefit both claimants and employers. 

Third, although some courts have held that class action waivers are enforceable even outside the arbitration context, such waivers are much more likely to be enforced if they are part of an arbitration agreement.  The availability of class action waivers in arbitration can greatly diminish the risks and costs associated with class action lawsuits.  Class and collective actions, particularly in the wage and hour context, are extremely costly to defend and can result in significant exposure to employers.  As Justice Ginsburg suggested in her dissenting opinion, there is an argument that even the existence of a class action waiver in an employment agreement can diminish the likelihood that certain wage and hour claims will be filed, as single-plaintiff wage and hour claims are less lucrative for plaintiff’s attorneys.

Nonetheless, employers should not mistake class action waivers for a “silver bullet.”  Many plaintiff’s attorneys are increasingly willing to file multiple single-plaintiff employment claims in arbitration.  The Supreme Court’s decision in Epic Systems also does not impact the ability of certain state and federal agencies, such as the Equal Employment Opportunity Commission (“EEOC”), to litigate claims on behalf of a class.

Drawbacks

There are also potential disadvantages to arbitration.  One of the principal drawbacks of arbitration is that arbitrators are less likely than judges to summarily dismiss meritless employment claims without an evidentiary hearing.  For example, according to a study published in 2013, between 2011 and 2012 federal courts summarily dismissed approximately 70% of all cases brought under Title VII of the Civil Rights Act of 1964.  Compared to judges, arbitrators are also more likely to misapply the law or “split the baby,” resulting in monetary awards for meritless employment claims.  In addition, although arbitration was originally conceived as a quicker and cheaper alternative to litigation, the costs associated with arbitration have steadily increased over the last several years, as arbitrators have shown an increased willingness to permit discovery and motion practice that is more consistent with the Federal Rules of Civil Procedure.

Employers with Existing Arbitration Agreements

Employers who already maintain an arbitration program should examine their existing employment agreements to ensure that they contain class action waivers.   Employers should also ensure that their existing agreements are well drafted and not subject to any contract-based defenses (such as lack of mutuality or unconscionability).

Bottom Line

Employers should weigh the costs and benefits discussed above to determine whether a mandatory arbitration policy is right for their workforce.  An arbitration program might not be the best fit for every employer.  For example, many employers and management-side employment lawyers prefer litigation to arbitration with respect to Title VII claims, as federal judges are more likely to dismiss meritless claims compared to arbitrators.  At the very least, however, Wyrick encourages employers to consider implementing mandatory arbitration agreements (including class actions waivers) that are limited to wage and hour claims, as such claims constitute a significant source of exposure for many employers.