The U.S. Supreme Court Upholds Class Action and Collective Action Waivers in Employment Arbitration Agreements
Paula Lopez, May 29, 2018.
The United States Supreme Court, in a 5-4 decision written by Associate Justice Neil Gorsuch, resolved a split in the circuits over the enforceability of class action and collective action waivers contained in employee arbitration agreements by holding that arbitration agreements containing class action waivers are enforceable and not in violation of the National Labor Relations Act (“NLRA”). The Supreme Court decision, Epic Systems Corp. v. Lewis, addresses appellate decision in the following three cases:
NLRB v. Murphy Oil USA Inc. (No. 16-307), a collective action against Murphy Oil USA Inc., for alleged violations of the Fair Labor Standards Act (FLSA). The district court dismissed the collective action and compelled arbitration enforcing class action waivers contained in the arbitration agreement signed by the plaintiffs-employees. The U.S. Circuit Court of Appeals for the Fifth Circuit affirmed the dismissal and rejected the National Labor Relations Board’s (“NLRB”) argument that the NLRA bans class-action waivers in arbitration agreements.
Epic Systems Corp. v. Lewis (No. 16-285), a wage and hour collective action against Epic Systems, a healthcare software company, alleging that the employer misclassified technical writers as exempt in violation of FLSA. The district court denied the employer’s motion to compel arbitration in accordance with the procedural terms of the employee arbitration agreements and the U.S. Circuit Court of Appeals for the Seventh Circuit affirmed the denial of the motion.
Ernst & Young LLP v. Morris (No. 16-300). A collective action claiming Ernst & Young misclassified employees to deny overtime wages in violation of the FLSA. The U.S. Circuit Court of Appeal for the Ninth Circuit held that the employer violated the NLRA by requiring employees to sign an arbitration agreement preventing them from bringing class and collective actions.
Justice Gorsuch rejected the two main arguments raised by the NLRB’s legal counsel, unions, and employees that the (i) saving clause in the Federal Arbitration Act (“FAA”) precludes the enforcement of class action waivers, and that (ii) Section 7 of the NLRA that affords employees the right to engage in concerted activity prohibits the inclusion of class-action waivers in arbitration agreements. With regard to the “saving clause” argument, Justice Gorsuch recognized that the FAA’s saving clause “allows courts to refuse to enforce arbitration agreements ‘upon such grounds as exist at law or in equity for the revocation of any contract.’” Long-standing precedent has widely interpreted this provision to limit the invalidation of arbitration agreements to instances that would allow the invalidation of any contract, such as “generally applicable contract defenses [of] fraud, duress, or unconscionability’.” Those defenses are not triggered by the inclusion of class-action and collective action waivers in employment arbitration agreements.
In holding that Section 7 of the NLRA does not override the FAA’s mandate of enforcing arbitration agreements as written, the majority decision relied on well-settled statutory interpretation principles. In the decision, Justice Gorsuch stated that “[w]hen confronted with two Acts of Congress allegedly touching on the same topic, the Court is not at ‘liberty to pick and choose among congressional enactments’.” The majority further found that the NLRB did not meet its burden of showing “a clearly expressed congressional intention” that the NLRA displaces the FAA. The Court also emphasized that Section 7 of the NLRA was enacted long before the class-action procedure and the FLSA’s collective-action provision existed. Moreover, there is nothing in the NLRA that disapproves of arbitration. Therefore, it is unlikely that Congress enacted Section 7 of the NLRA with the intent of endorsing or disapproving class action waivers or to limit the enforceability of arbitration agreements under the FAA.
Justice Ginsburg wrote the dissenting opinion and warned that the majority’s ruling would have a detrimental effect on the rights of employees to act collectively in enforcing their rights under the FLSA. By enforcing class and collective action waivers in arbitration agreements, employees will be dissuaded from bringing individual claims against employers for violating wage and hour laws, where the cost of bringing such claims may be greater than the recovery. Likewise, Justice Ginsburg warned that some employers “will no doubt perceive that the cost-benefit balance of underpaying workers tips heavily in favor of skirting legal obligations,” and called on Congress to take action.
The Supreme Court’s decision has been lauded as a win for employers. Employers who include class and collective action waivers in their employee arbitration agreements will have the cost benefit of arbitrating a single party’s claims and limiting its exposure of liability to a single employee’s claims as opposed to a class of plaintiffs. However, individual arbitrations will not resolve disputes class-wide and employers run the risk of having to litigate identical claims on an individual basis and ending up with inconsistent arbitration decisions. Therefore, employers interested in incorporating such waivers in their employment arbitration agreements should consider the benefits and disadvantages associated with their enforcement based on the nature of the claims being asserted by the employees.