On 21 May 2018, the Supreme Court, in a strongly divided 5-4 ruling, upheld mandatory arbitration agreements that prohibit employees from bringing employment claims on a class or collective basis. This long-awaited decision, Epic Systems Corp. v. Lewis, is one of the most important in employment law in the past several years. As the 30-page dissenting opinion made clear, however, depending on the make-up of a new Congress, we may see legislation that reverses this ruling. Nevertheless, the Court’s ruling is straightforward, expected and the clear law of the land going forward.
This decision resulted from three cases addressing whether class action waivers in mandatory employment arbitration agreements were legally enforceable; that is, whether these agreements could prohibit employees from arbitrating or litigating collectively with others making the same claims. Three US Judicial Circuits – the Sixth, Seventh, and Ninth – determined that the right to bring a class or collective action is protected concerted activity under the National Labor Relations Act (NLRA), and that class action waivers violate that right. On the other hand, the Second, Fifth and Eighth Circuits determined that the Federal Arbitration Act (FAA) states clearly and unequivocally that courts are to enforce arbitration agreements as written, other than on very narrow grounds (such as fraud). In October 2017, the Supreme Court held hearings on these three cases and yesterday issued the closely followed decision.
The Supreme Court’s findings
As the Court first explained, through the FAA, Congress has instructed federal courts to enforce arbitration agreements ‘according to their terms – including terms providing for individualised proceedings.’ It bluntly rejected the concept that the NLRA includes a conflicting provision. While the NLRA ‘secures to employees rights to organise unions and bargain collectively,’ it ‘says nothing about how judges and arbitrators must try legal disputes that leave the workplace and enter the courtroom or arbitral forum.’ Because the Supreme Court ‘has never read a right to class actions into the NLRA,’ it declined to do so now.
It also stated that the FAA and NLRA do not contradict each other; rather, they have ‘long enjoyed separate spheres of influence and neither permits this Court to declare the parties’ [class action waiver] agreements unlawful.’
The majority also noted that the underlying legal actions addressed wage claims ‘and arise not under the NLRA but under an entirely different statute, the Fair Labor Standards Act (FLSA).’ The Court pondered, then, why the plaintiffs did not argue that the FLSA overcomes the FAA to permit their class and collective actions: ‘Presumably because this Court held decades ago’ that the FLSA’s collective action scheme does not displace the FAA or prohibit class action waivers in an arbitration agreement.
‘Faced with that obstacle, the employees are left to cast about elsewhere for help. And so they have cast in this direction, suggesting that one statute (the NLRA) steps in to dictate the procedures for claims under a different statute (the FLSA), and thereby overrides the commands of yet a third statute (the FAA). It’s a sort of interpretive triple bank shot, and just stating the theory is enough to raise a judicial eyebrow.’
In fact, through this language, the Court makes clear that the NLRA has nothing to do with ‘how judges and arbitrators must try legal disputes that leave the workplace and enter the courtroom or arbitral forum.’ Extrapolating logically from this holding, if the NLRA does not provide a right to pursue collective or class actions (as the Supreme Court clearly held), then the issue is not whether the NLRA conflicts with the FAA; rather, the issue is whether a collective or class action waiver outside an arbitration agreement may be enforceable. And, while not directly decided by the Court, it appears that such a provision is likely to be enforceable.
The bottom line is that a well-drafted mandatory arbitration agreement that contains a class or collective action waiver is enforceable. In a statement issued on 21 May 2018, the National Labor Relations Board (NLRB) stated that it currently has 55 pending cases with allegations that employers violated the NLRA by maintaining or enforcing individual arbitration agreements or policies containing class and collective-action waivers. The Board further stated that it is ‘committed to expeditiously resolving these cases in accordance with the Supreme Court’s decision.’
While some state laws prohibit class waivers (e.g. the California Private Attorneys General Act, prohibiting the waiver of representative actions) and new laws prohibit arbitration of certain claims (e.g. New York’s effective prohibition against arbitrating sexual harassment claims), for those companies who believe arbitration is the best method to resolve their employment disputes, this decision uniformly upholds their right to require individualised arbitration of their claims.
Nevertheless, even under this clear decision, whether to arbitrate all employment claims or only some, whether to arbitrate at all or have jury trial waivers instead, remain at the forefront of ‘hot topic’ employment issues.
The success of arbitration agreements depends on the manner in which they are drafted. Arbitration agreements that are not correctly drafted may cost employers substantially more than if the employers had not implemented the agreements. Employers are encouraged to review their agreements to ensure they comply with all applicable laws.