Many employers require employees to sign arbitration agreements as a condition of their employment. Under those agreements the employee gives up his/her right to sue in court over job-related issues such as wrongful termination, breach of contract, and discrimination, and agrees to pursue such legal claims against the employer through arbitration. These agreements often go further to provide for individualized arbitration proceedings, which means that claims pertaining to different employees will be heard in separate arbitration hearings – thereby precluding employees from bringing collective or class actions regarding workplace claims. The use of mandatory, pre-dispute arbitration agreements has increased significantly over the past two decades. A 2017 survey by the Economic Policy Institute showed that approximately 60 million private-sector, nonunion employees in the United States are subject to mandatory arbitration in their employment agreements, and almost 25 million of those agreements include a class action waiver.
The issue of whether these class action waivers are enforceable has been a contentious issue. Although the Federal Arbitration Act (“FAA” or “Arbitration Act”) generally requires courts to enforce arbitration agreements as written, the FAA contains a so-called “saving clause” that permits courts to refuse to enforce arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract.” Employees have argued that the FAA’s “saving clause” nullifies the enforceability of an arbitration agreement if that agreement violates some other federal law. Specifically, until the United States Supreme Court decision discussed below, federal courts disagreed whether arbitration agreements containing a class action waiver violate the National Labor Relations Act (“NLRA”), thus rendering them invalid and unenforceable. On May 21, 2018, the Supreme Court resolved this issue, holding that agreements requiring employees to arbitrate claims on an individual basis are enforceable. Here’s what you need to know.
Some Differences Between Arbitration and a Court Case
An arbitration differs from a court case in a number of ways, including:
- An arbitration is not heard and decided by a judge or jury, but by a neutral and independent “arbitrator” agreed to by the parties, and who is paid by one or both sides to listen to the evidence and witnesses, and issue a decision, which is called an “award.”
- The arbitration process generally limits the amount of information each side can get from the other, which oftentimes gives the employer an advantage because the employer is usually the one in possession of most of the documents and information relating to the employee’s case.
- Arbitrations are less formal than court trials, which can make the process easier for all involved, especially employees who are not used to litigation.
- Arbitration cases are generally heard and decided much more quickly than court cases, which can take several years from start to finish, and arbitration is usually less expensive.
How We Got Here
Until a few years ago, both courts and the National Labor Relations Board (the “NLRB”) seemed to be generally in agreement that arbitration agreements (including ones that required individualized proceedings) were to be enforced according to their terms. However, in 2012 the NLRB ruled in D.R. Horton, Inc., 357 N.L.R.B. 2277 (2012), that arbitration agreements containing class action waivers violated Section 7 of the NLRA, which guarantees workers the rights to self-organize, to form labor organizations, to bargain collectively, and to “engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” In its ruling, the NLRB found that agreements requiring employees to arbitrate their claims on an individual basis violated the NLRA, rendering these agreements invalid and unenforceable.
Since the NLRB’s decision, federal appellate courts have split on the issue. Some circuit courts, including the Seventh and Ninth Circuits, agreed with the NLRB, while other circuit courts, including the Fifth Circuit, found such class action waivers to be enforceable and not in violation of the NLRA.
The Epic Systems Case
Against this background of conflicting decisions by various federal courts and the NLRB, on May 21, 2018, the United States Supreme Court held, in a 5-4 decision, that agreements requiring employees to arbitrate claims on an individual basis are enforceable.
The case, Epic Systems Corp. v. Lewis, 584 U.S. ____ (2018), consolidated three different cases on appeal from the Fifth, Seventh and Ninth Circuits. In each of these cases, an employer and employee had entered into a contract providing for individualized arbitration proceedings to resolve employment disputes between the parties. Nevertheless, the employee plaintiffs in each of these cases sought to litigate Fair Labor Standards Act and related state law claims through class or collective actions in federal court. To avoid enforcement of the class action waivers under the FAA, the employees argued that, by requiring individualized proceedings, the arbitration agreements at issue violated Section 7 of the NLRA, which under the FAA’s saving clause rendered the arbitration agreements unenforceable. The employer defendants, on the other hand, argued that the FAA protects agreements requiring arbitration from judicial interference, and that neither the FAA’s saving clause nor the NLRA demands a different conclusion. A majority of the Supreme Court agreed with the employers.
The FAA’s Saving Clause Did Not Apply to the Employees’ Claims
The FAA “requires courts ‘rigorously’ to ‘enforce arbitration agreements according to their terms, including terms that specify with whom the parties choose to arbitrate their disputes and the rules under which that arbitration will be conducted.’” Nonetheless, the Court noted that the FAA’s saving clause, by its terms, “allows courts to refuse to enforce arbitration agreements ‘upon such grounds as exist at law or in equity for the revocation of any contract.’”
The employee plaintiffs in Epic Systems argued that the FAA’s saving clause creates an exception for cases like theirs, where the arbitration agreement (arguably) violates some other federal law. In its Horton decision the NLRB found that requiring employees to arbitrate their claims on an individual basis was a violation of the NLRA. The employees in Epic Systems argued that the saving clause applied because the NLRA renders their class and collective action waivers illegal, and in their view, “illegality under the NLRA is a ‘ground’ that ‘exists at law … for the revocation’ of their arbitration agreements, at least to the extent those agreements prohibit class or collective action proceedings.” The Court rejected this argument, holding that in permitting courts to refuse to enforce arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract . . . ”, the FAA’s use of “any contract” limits the saving clause only to generally applicable contract defenses, such as fraud, duress, or unconscionability, and not to defenses specific to arbitration contracts (such as the employees’ claims that arbitration agreements requiring individualized proceedings are unlawful under the NLRA).
The NLRA Does Not Conflict with the FAA
But the employees were not done yet. Following the NLRB’s decision in Horton, they argued that Congress nonetheless intended Section 7 of the NLRA to render employee class action waivers in arbitration agreements unlawful, even though such class action waivers would otherwise be enforceable under the FAA. That is, in cases like theirs, the NLRA overrides the FAA. The Court noted that when confronted with two Acts of Congress allegedly touching on the same topic, the Court must strive to give effect to both. To prevail in this case, the employees must show a “clear and manifest” congressional intent to displace one Act with another.
After a lengthy and comprehensive analysis of Congress’ intent, the Court held that there is no conflict between the NLRA and the FAA. The NLRA “secures to employees rights to organize unions and bargain collectively, but … says nothing about how judges and arbitrators must try legal disputes that leave the workplace and enter the courtroom or arbitral forum.” Focusing specifically on the language of Section 7 of the NLRA, the Court found that “the term ‘other concerted activities’ should, like the terms that precede it, serve to protect things employees ‘just do’ for themselves in the course of exercising their right to free association in the workplace, rather than ‘the highly regulated, courtroom-bound ‘activities’ of class and joint litigation.’” (Emphasis added.) Moreover, the Court noted that Congress has shown it knows exactly how to specify certain dispute resolution procedures, or to override the FAA; however, Congress has done nothing like that in the NLRA, which is further evidence that Section 7 does nothing to address the question of class and collective actions.
In short, the Court found that Congress intended Section 7 of the NLRA to grant employees certain rights to act together in the workplace – but did not intend to extend those rights to judicial or arbitral proceedings already governed by the FAA. As such, the Court held that the NLRA does not “override” the FAA or render employee class action waivers in arbitration agreements illegal or unenforceable. Justice Gorsuch concluded:
The policy may be debatable but the law is clear: Congress has instructed that arbitration agreements like those before us must be enforced as written. While Congress is of course always free to amend this judgment, we see nothing suggesting it did so in the NLRA – much less that it manifested a clear intention to displace the Arbitration Act. Because we can easily read [the FAA and the NLRA] to work in harmony, that is where our duty lies.
What Does This Mean for Employers? – The Pros and Cons of Class-Action Waivers
An employer that does not already utilize mandatory arbitration agreements with class and collective action waivers should consider whether implementing this type of agreement makes sense for its business. While the Epic Systems decision made it clear that mandatory arbitration agreements with class and collective action waivers are enforceable (at least in the context of federal law), employers still must weigh various factors to decide if such agreements are right for them.
- From a cost standpoint, for most employers the ability to prevent class and collective actions has a lot of appeal.
- For wage and hour claims, the purported class can be extensive, the time and cost to defend against such claims can be substantial, and if the employees are successful the employer is required to pay the employees’ reasonable attorneys’ fees.
- And even if the underlying claims are not strong, employees may use the class or collective action procedure as a vehicle to increase costs and try to force settlement with the employer.
- However, the cost of defending dozens of individual arbitrations, each likely based on the same theory, can also be substantial.
- The Supreme Court has held that employees may not be required to pay “prohibitive” costs in pursuing their federal employment rights, which often means that the employer will bear most of the burden of the arbitration costs, such as the filing fees, administrative fees, and the arbitrator’s fee. The employer would be required to pay these fees for each individual claim filed by an employee covered by a class or collective action waiver.
- In addition, under the American Arbitration Association’s Employment Arbitration Rules and Mediation Procedures, with the exception of a $200 capped filing fee, the employer is responsible for all costs associated with an arbitration arising from an employer-promulgated arbitration plan.
- Employers should also consider the impact on employee morale of requiring arbitration agreements with class and collective action waivers. Many employee-side commentators have decried the Epic Systems decision as undermining employee rights.
- It should be noted that employers may face some uncertainty concerning state statutory and common law contract interpretations that may invalidate the terms of arbitration agreements, despite Epic Systems.
- For example, several states have recently enacted limits on arbitration agreements that relate to sexual harassment claims, and some state courts have imposed exacting contractual wording requirements before enforcing arbitration clauses that waive the right to proceed with a court action.
- Because of the uncertainty regarding whether a nonfederal law can override the FAA, employers should consider back-up contractual jury trial waivers in their arbitration agreements, if the governing state law permits pre-litigation jury trial waivers.
- It should also be noted that the Epic Systems decision does not preclude lawsuits challenging arbitration agreements on general contract grounds, such as fraud, duress, or unconscionability, so employers should continue to be diligent about the general enforceability of their arbitration agreements.
- In particular, employers should ensure that their arbitration agreements provide for due process and are not subject to claims that the terms are unconscionable and therefore unenforceable.
If you have further questions regarding the topic of this article or need help implementing the right dispute resolution mechanism for your business, please contact Patrick Jones at pjones@fh2.com or (770) 399-9500.
