June 4, 2018 – In a Wisconsin-based case that could have far-reaching effects on employment litigation, the U.S. Supreme Court has ruled that mandatory arbitration agreements requiring employees to submit claims to arbitration on an individual basis and thus bar employee claims on a collective or class basis are enforceable.
In Epic Systems v. Lewis, decided on May 21, 2018, the Supreme Court resolved a circuit split over the enforceability of class action waivers in employment arbitration agreements. Many employment agreements include clauses requiring that employees bring legal claims in individual arbitration, and explicitly preclude employees from bringing these claims as part of a collective or class action (a class waiver).
Courts were divided over whether class waivers are barred by the National Labor Relations Act (NLRA), which protects the rights of employees to engage in “concerted activities for the purpose of … mutual aid or protection.”1
Employees maintain that collective litigation is a concerted activity within the meaning of the NLRA, and that class action waivers are therefore unlawful interference with a protected right. On the other side, employers argue that the Federal Arbitration Act (FAA) indicates a federal policy favoring arbitration agreements, and means arbitration agreements containing collective action waivers must be enforced according to their terms.
Epic Systems v. Lewis and the Circuit Split
Plaintiff Jacob Lewis filed a collective and class action complaint in the U.S. District Court for Western District of Wisconsin alleging his employer, Epic Systems, had misclassified him and similarly situated employees, depriving them of overtime wages.
Sean Scullen , is a partner with Quarles & Brady, LLP, in Milwaukee, where he is National Chair of the Labor & Employment practice and frequently defends employers in wage and hour matters.
Caitlin Madden, U.W. 2014, is an associate attorney with Hawks Quindel S.C. in Madison, where she practices in wage and hour and employment discrimination.
Epic moved to dismiss, seeking to enforce its arbitration agreement, which required employees to bring wage payment claims in individual arbitration. The court denied Epic’s motion, finding Epic’s class waiver unlawful under the NLRA.2
The U.S. Court of Appeals for the Seventh Circuit affirmed that decision.3 Shortly thereafter, the Seventh Circuit was joined by the Ninth and Sixth circuits in holding that class waivers in arbitration agreements are impermissible under the NLRA.4
This created a circuit split, as the Fifth Circuit had previously ruled that requiring the availability of class-wide actions is an impediment to arbitration and therefore violates the FAA, and that in the absence of a contrary congressional command establishing that the NLRA supersedes the FAA, the FAA controls.5
The Supreme Court granted certiorari to resolve this split, combining Epic Systems with Ernst & Young from the Ninth Circuit and a Fifth Circuit case.6
The Court heard the consolidated cases on the first day of the 2017-18 term and issued its decision last month. In a 5-4 decision, the Court reversed the Seventh Circuit, holding that class waivers in employment arbitration agreements are enforceable.
The Majority Decision and Dissent
Writing for the majority, Justice Neil Gorsuch concluded that the FAA requires enforcement of agreements to arbitrate, and that the NLRA lacked a “clear congressional command” precluding the enforcement of class waivers in employment agreements.
The majority rejected employees’ argument that the FAA’s “savings clause,” which states arbitration agreements are still subject to grounds that exist at law for the revocation of any contract, meant the agreement is not enforceable.
Because the employees object to the class waiver specifically, and attack “the individualized nature of the arbitration proceedings,” the employees “interfere with one of arbitration’s fundamental attributes” by allowing one party to demand collective treatment. Finally, the majority noted that collective litigation is not explicitly included in the “concerted activities” protected by the NLRA.
In dissent, Justice Ruth Bader Ginsburg reviewed the history of the NLRA and its purpose in protecting employees’ right to act collectively, including recognition by courts and the National Labor Relations Board that “concerted activity” encompasses lawsuits to enforce workplace rights.
The dissent also questioned the majority’s framing of the issue as concerning the enforcement of a mutual agreement, given that the employees in the underlying cases were required to accept the terms of their employers’ agreements as a condition of their employment. The dissent maintained that because collective action waivers are unlawful under the NLRA, the common-law contract defense of illegality available under the FAA’s savings clause harmonizes the two laws, and no conflict exists.
In conclusion, the dissent noted its concern that the decision may lead to the “underenforcement of federal and state statutes designed to advance the well-being of vulnerable workers.”
What’s Next for Practitioners?
Employer use of mandatory, pre-dispute arbitration agreements has been on the rise for the past two decades. According to a study by the Economic Policy Institute, 56 percent of private sector nonunion workers, or 60 million people, are currently subject to mandatory arbitration in employment contracts, and 25 million of those employees have a class waiver in their employment agreement.
Now that the Supreme Court has definitively ruled on the enforceability of class waivers, more employers will likely follow suit. This follows from the fact that class and collective actions are extremely expensive for employers to litigate and can result in substantial settlements. Additionally, arbitrations are private, may involve less discovery and avoid the potential of a "runaway" jury verdict. Employers have to ensure, however, that the arbitration agreements they draft provide for due process and are not subject to claims that the terms are unconscionable and therefore unenforceable.
Further, mandatory arbitration programs are not necessarily a panacea for employers. For instance, individual arbitration can be costly. The filing fee alone, which some arbitrators require to be paid by the employer, may exceed filing fees for federal court.
For example, the FAA currently caps the nonrefundable filing fee for an individual employee filing a claim at $300 and requires the employer to pay a $1,900 filing fee and a $750 case management fee at the start of a case.
Rather than a single, collective suit, employers will be required to pay these fees for each individual claim filed by a worker covered by a class or collective action waiver.
Counsel for employees, if prevented from bringing these claims collectively, may instead file numerous individual arbitrations concerning the same issues, each with its attendant costs, although the lack of class procedures will make it more difficult for plaintiffs' attorneys to identify and communicate with all potential individuals affected.
Additionally, employers may have numerous employees bringing similar claims without the ability to have them resolved in a single collective/class action. There is also less likelihood that an arbitrator will resolve a case through an early dispositive motion. Finally, there is a general belief that arbitrators are more likely to "split the baby" and adverse arbitration decisions can only be appealed on very limited grounds.
Social Pressure and Potential Legislative Change
Finally, due to increased awareness around the effect of arbitration agreements on employees seeking to bring sexual harassment claims and the “Me Too” movement, social pressure may preclude some companies from including class waivers in arbitration agreements, or mandating that employees arbitrate disputes at all.
In addition, while federal legislative change is unlikely in the current political climate, there may be movement on the state law front that would preclude arbitration agreements involving class action waivers.
The Supreme Court’s decision provides certainty in a previously unsettled area of the law. Counsel for both employees and employers will need to consider how to best advise clients as to the benefits and downsides of arbitration, and how to navigate this new landscape.
This article was originally published on the State Bar of Wisconsin’s Labor & Employment Law Section Blog. Visit the State Bar sections or the Labor & Employment Law Section web pages to learn more about the benefits of section membership.
1 29 U.S.C. § 157
2 2015 U.S. Dist. LEXIS 121137 (W.D. Wis. Sept. 10, 2015).
3 Lewis v. Epic Sys. Corp., 823 F.3d 1147 (7th Cir. 2016).
4 Morris v. Ernst & Young, LLP, 834 F.3d 975 (9th Cir. 2016); NLRB v. Alt. Entm’t, Inc., 858 F.3d 393 (6th Cir. 2017).
5 D.R. Horton v. NLRB, 737 F.3d 344, 360 (5th Cir. 2013); see also Owen v. Bristol Care, Inc., 702 F.3d 1050 (8th Cir. 2013) (finding class waivers in employment agreements enforceable).
6 NLRB v. Murphy Oil USA, Inc. Epic Sys. Corp. v. Lewis, 137 S. Ct. 809 (Jan. 13, 2017).