Thousands of businesses across the nation breathed a sigh of relief on May 21, 2018, as the U.S. Supreme Court, in a 5-4 decision, ruled that employment contracts containing class-action waivers are enforceable under the Federal Arbitration Act (FAA).
The ruling in Epic Systems Corp. v. Lewis not only helps protect thousands of businesses across the nation from costly and time-consuming employment class actions, but also changes the way that claims managers should approach these claims when they first arrive.
Bilateral arbitration benefits both employees and employers because it offers speed, efficiency, and informality. The court has consistently recognized the advantages of bilateral arbitration, especially in the employment context, and many employers now use arbitration agreements.
There are many minor employment law violations that employees truly care about, and the related actions provide fairly small recoveries of just a few hundred or few thousand dollars each. However, if an aggrieved employee or recently terminated employee brings these claims on a class-wide basis, it can mean millions of dollars in damages for systemic violations of employment laws, not to mention hefty attorney costs. To avoid one employee turning a minor issue into a massive class-wide exposure, employers began incorporating class-action waivers into their arbitration agreements.
Although the specific language may vary, class-action waivers provide that the employee and the employer agree to resolve all employment disputes on an individual basis. By agreeing to the waiver provision, the employee gives up the potential opportunity to participate in a class-action lawsuit against the employer or to act as a class representative in bringing a class action. One of the waivers at issue in Epic Systems Corp., for example, stated that all employment disputes would be resolved through individualized arbitration, with claims “pertaining to different employees to be heard in separate proceedings.”
As a sound business practice, class waivers should be included within the employee-employer arbitration agreement due to the deference courts give to arbitration agreements under the FAA. With the court’s ruling, it is expected that the popularity of class-action waivers will rise as businesses continue to seek ways to mitigate risk and reduce litigation costs.
History in the Courts
The Supreme Court asserted in 1991 that employment disputes could be subject to an employer-employee arbitration agreement, and, in 2011, the Supreme Court affirmed a class-action waiver related to consumer class actions in AT&T Mobility LLC v. Concepcion. In affirming the enforceability of these provisions, courts have traditionally enforced waiver provisions under the FAA. The FAA expresses a “liberal policy of favoring arbitration agreements” that essentially directs the courts to enforce arbitration agreements according to their terms. The FAA also has been held to at least partially preempt competing state laws regarding the enforceability of arbitration provisions.
Fast forward to the present, and although the Supreme Court has affirmed the enforceability of class waivers in consumer and merchant actions, the court’s Epic Systems Corp. decision in favor of employers was not a foregone conclusion. In 2012, the National Labor Relations Board (NLRB) ruled that an arbitration agreement where the employee agrees to waive the right to bring or participate in a class action violates the National Labor Relations Act (NLRA).
In 2016, the Ninth Circuit Court of Appeals, in Ernst & Young LLP v. Morris, threw the matter further into doubt when it ruled that class waivers were unenforceable under the NLRA. In its ruling, the Ninth Circuit held that class-action waivers infringed upon the employee’s right to engage in collective action, a right protected under the NLRA that could not be waived by the employee, especially since there is generally an unequal bargaining power between employees and employers.
The Ninth Circuit’s ruling clashed with a contemporaneous Seventh Circuit decision that held that waiver provisions are enforceable. The split amongst the federal circuits set the stage for the Supreme Court’s review of this issue.
Supreme Court Review
The Supreme Court framed the competing considerations as: “Should employees and employers be allowed to agree that any disputes between them will be resolved through one-on-one arbitration? Or should employees always be permitted to bring their claims in class or collective actions, no matter what they agreed to with their employers?” In other words, does the FAA or the NLRA control the enforceability of class waivers in connection with employment disputes?
The FAA generally protects the rights of parties to privately contract for arbitration to resolve disputes, and to set the parameters of how such an arbitration hearing shall proceed. The dissent argued that class-action waivers infringe upon the employee’s right to organize unions and collectively bargain under the NLRA. The majority opinion, written by Justice Neil Gorsuch, noted that the NLRA does not mention an employee’s right to participate in a class-action lawsuit; it protects the employee’s right to bargaining collectively and to participate in collective action through union-related activities.
Congress passed the NLRA after it passed the FAA, and since there is no mention of class actions or arbitrations in the NLRA, the majority held that the NLRA does not protect a worker’s right to participate in a class-action lawsuit or otherwise preempt arbitration agreements.
The employees in Epic Systems Corp. next argued that the FAA contains a “savings clause” that permits courts to refuse the enforcement of arbitration provisions “upon such grounds as exist at law or in equity for the revocation of any contract.” The employees argued that the savings clause applied because the NLRA prohibits any agreement that infringes upon the employee’s right to participate in collective action.
In response, the majority reasoned that the savings clause only concerns traditional contract defenses such as illegality; there is nothing illegal about an agreement to resolve employment claims on an individual basis.
Though the Supreme Court noted that the underlying policies surrounding this issue are debatable, it ultimately determined that the FAA’s plain language requires the enforcement of arbitration agreements according to their terms, including those terms that require individual proceedings. In short, the Supreme Court held that the NLRA does not protect an employee’s right to participate in a class-action lawsuit and that employment agreements that require employment disputes to be resolved via one-on-one arbitration are enforceable under the FAA.
What Does It Mean for Risk and Claims Managers?
This long-awaited decision reduces the possibility of costly and time-consuming class-action employment lawsuits. Risk managers should assess their current employment practices and include arbitration provisions with class waivers. They should also make sure that the arbitration agreements are actually enforceable. Plaintiffs routinely challenge the enforceability of arbitration agreements with class waivers.
An employee should specifically sign an arbitration agreement—it is not enough to simply have a clause in an employee handbook calling for arbitration. Additionally, intake policies that use electronic signatures for the acknowledgement of arbitration forms should have adequate steps to authenticate an employee’s signature.
Claims managers should promptly review any class claims for potential arbitration agreements and work with counsel to immediately move to compel arbitration of any class disputes to ensure that the client has not waived its rights to enforce the agreement. Knowing when and where to look for a potential class-action waiver or employee-employer arbitration provision is an important part of handling any employment claim. As noted earlier, plaintiffs often attempt to challenge the authenticity of arbitration agreements, so it is important to work closely with a client’s human resources department to ensure the company is ready to support a petition to compel arbitration with declarations that can adequately authenticate the arbitration agreement and class waivers to the courts.
What Does This Mean for Employers?
Employment class actions are a source of significant financial and organizational risk for employers. In California, one mistake on a weekly pay stub could result in dozens of labor code violations per year for every employee. Likewise, an error in scheduling rest breaks could mean violations for every employee for every day of work.
If one employee (or, more typically, a recently terminated employee) files a claim for even a minor California Labor Code or Federal Fair Labor Standards Act violation, a class-action lawsuit has the potential to put every one of these violations at issue. The ability to contractually resolve employment disputes on an individual basis, where claims are typically much smaller and less complex, provides a considerable benefit to employers.
Although the decision in Epic Systems Corp. does provide some relief for employers, it does not preempt certain state laws, including claims based on the California Private Attorneys General Act, (PAGA). Although PAGA claims are based on the employee’s allegations against the employer, the claim is technically brought on behalf of the State of California, with the employee and her attorney acting as a deputized private attorney general of the state.
Since the claim is technically brought on behalf of the State of California, it is not considered a class action and, hence, not subject to a wavier in an arbitration agreement. That said, an arbitration agreement that states all claims must be brought on an individual basis can limit the types of damages recoverable in a PAGA action to the types of civil penalties that the state can assess against employers for violations of the labor code.
The ruling, however, does not mean that all class-action waivers are automatically enforceable. Arbitration and class-waiver agreements must still comport with state and federal laws. Courts, for example, still require that the arbitration and/or class-waiver provision be an enforceable agreement under normal contract law; defenses such as unconscionability still apply and the provision must, of course, encompass the underlying claim.
In some jurisdictions, employment offers that are contingent upon an employee’s agreement to a waiver provision without any opt-out procedure may not be enforceable. For these reasons, businesses that use, or are considering, class-action waiver provisions in their employment agreements should consult with an experienced employment attorney to help ensure that the provisions are enforceable under state and federal laws.