May 29, 2018

U.S. Supreme Court Approves Employment Arbitration Agreements with Class Action Waivers

On May 21, 2018, the U.S. Supreme Court upheld the enforceability of class action waivers in employment arbitration agreements in its Epic Systems v. Lewis decision. Because private arbitration is generally viewed as a speedier, less costly, and less disruptive alternative to litigating employment disputes in court, many businesses require employees to sign arbitration agreements upon hire. Such agreements increasingly include waivers of rights to pursue class actions. Until the Epic Systems decision, the enforceability of class action waivers in arbitration agreements was unsettled. The National Labor Relations Board (NLRB) had held that such waivers interfered with rights under federal labor law, and the circuits had divided over whether the NLRB’s decision was valid.

Enforceable Under Arbitration Law, or Unenforceable Under Labor Law?

The Supreme Court’s decision was based on three consolidated wage-and-hour cases. In each case, an employee entered into an agreement to arbitrate disputes with the employer, which specified that the arbitration would proceed on an individualized basis, precluding any class or collective action. In two of the cases, the employee nevertheless filed a class or collective action lawsuit seeking overtime pay on behalf of the employee and other employees, and the employer responded by seeking to compel arbitration on an individualized basis. In the third case, the NLRB accused the employer of violating federal labor law by adopting an agreement requiring individual arbitration of workplace disputes.

The stakes were high. If the terms requiring individualized arbitration were enforceable, each employee would need to arbitrate his or her respective claims individually, outside of court. If unenforceable, each employer would need to defend itself in court against national class and collective actions, with vastly greater potential damages than in any individual case, and would potentially be subject to proceedings before the NLRB.

The employees’ position against class action waivers in arbitration agreements pitted two federal statutes against one another: the Federal Arbitration Act (FAA) and the National Labor Relations Act (NLRA). The FAA was enacted in 1925 in response to growing concerns that courts were not regularly enforcing arbitration agreements. The FAA generally requires courts to respect and enforce an agreement between parties to arbitrate their disputes unless the agreement is otherwise invalid “upon such grounds as exist . . . for the revocation of any contract.”  Arbitration under the FAA generally proceeds on an individualized basis: the Supreme Court has previously held that an arbitration agreement will not be read to authorize classwide arbitration unless the parties actually agree to that procedure.

The NLRA was enacted in 1935. Section 7 of the NLRA establishes a right for most non-managerial and non-supervisory employees to engage in “concerted activities for the purpose of collective bargaining or other mutual aid or protection.” In 2012, reversing its previous longtime position, a majority of the NLRB held that class action waivers in arbitration agreements were unenforceable based on the position that pursuing class actions is a form of “concerted activit[y]” that is protected from interference under Section 7 of the NLRA. Plaintiffs in private litigation, including the plaintiff employees in two of the consolidated cases before the Supreme Court, relied on the NLRB’s decision and argued that Section 7 rendered their class and collective action waivers illegal and therefore unenforceable under the FAA.

The Supreme Court’s Decision in Epic Systems

Writing for the majority in a 5-4 decision, Justice Neil Gorsuch rejected the employees’ argument. The Court concluded that a challenge to an arbitration agreement based on the NLRA was not among the types of contractual defenses that the FAA preserved. Moreover, the Court rejected the argument that a class action waiver interfered with NLRA rights, observing that “[t]he notion that Section 7 confers a right to class or collective actions seems pretty unlikely when you recall that proce­dures like that were hardly known when the NLRA was adopted in 1935.” The Court further reasoned that the NLRA’s protections for “concerted activities” apply to workplace activities, such as union organizing or collective bargaining, rather than courtroom activities. 

The Court concluded that courts must enforce arbitration agreements in accordance with their terms, including those that waive the right to bring class actions, unless federal law explicitly excludes the claims at issue from arbitration or unless traditional contract defenses apply.

Potential Future Legal Implications of the Epic Systems Decision

The Court noted that Congress could change this result. Indeed, the dissenting opinion authored by Justice Ruth Bader Ginsburg called for such action, asserting that “Congressional correction of the Court’s elevation of the FAA over workers’ rights to act in concert is urgently in order.”  

The Epic Systems decision does not necessarily affect current California Supreme Court precedent excluding from individual arbitration representative claims under the Private Attorneys General Act (PAGA). An employee’s right to bring a PAGA action in court remains unwaivable under current California law. 

Implications of the Epic Systems Decision for Employers

In light of the Supreme Court’s holding, employers that do not currently use arbitration agreements with class action waivers should consider whether to do so. Class action waivers in arbitration agreements are powerful tools for employers that could otherwise face class-based employment claims, such as wage-and-hour claims. Even aside from class action waivers, arbitration agreements can assist employers to control employment litigation risks and costs. 

There may be competing considerations, however. In the wake of the #MeToo movement, arbitration agreements are increasingly controversial, at least to the extent that they apply to sexual harassment claims and require that the proceedings be conducted confidentially. Indeed, some states have enacted and others are considering laws prohibiting employers from requiring the arbitration of sexual harassment claims. While those state laws may be subject to a preemption challenge under the FAA, regardless of whether those restrictions are ultimately held to be permissible, some employers may face resistance from their workforce to requiring arbitration, particularly if the arbitration agreement does not exclude sexual harassment claims. 

Employers that are considering adopting arbitration agreements should carefully weigh these considerations.

Note: Goodwin represented the Business Roundtable as one of the amici curiae supporting the employers’ position in the Supreme Court.