On Monday, May 21, 2018, the Supreme Court issued a split 5-4
decision (along party lines) regarding the enforcement of arbitration agreement
clauses prohibiting employees from seeking class or collective action for
certain employment claims, in this case, FLSA claims.
The decision consolidated 3 cases (Epic Systems Corp. v. Lewis, NLRB v. Murphy Oil Co, and Ernst &
Young LLP v. Morris) with conflicting decisions in different circuits of
the U.S. Circuit Court of Appeals. In
these cases, arbitration agreements required employees to submit their wage and
hour claims to binding arbitration and to do so on an individual basis.
In previous decisions, the Sixth, Seventh, and Ninth courts agreed
with employees who claimed arbitration provisions violated the National Labor
Relations Act (NLRA) because they prohibited class actions and denied workers
the right to engage in “protected concerted activities” for their mutual aid
Conversely, the Second, Fifth, and Eighth courts agreed with
employers who argued the Federal Arbitration Act (FAA) allows enforcement of
arbitration agreements as written except on very narrow grounds such as fraud.
In writing the majority’s decision,
Justice Neil Gorsuch explained that Congress has instructed federal courts to
enforce arbitration agreements “according to their terms – including terms
providing for individualized proceedings” and that these provisions remain
enforceable under the FAA.
Justice Gorsuch writes that, while the NLRA “secures to
employees rights to organize 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.” He stated the Court has
never read an employee’s right to class actions into the NLRA.
He also explains that section 7 of the NLRA was enacted in
1935 before the Federal Rules of Civil Procedure created class actions in 1966
and before the FLSA had codified its collective action provisions. The Court
concluded that this timing along with the fact that section 7 does not mention
the forms of group litigation that did exist in 1935 nor does it approve or
disapprove of arbitration means that section 7 of the NLRA was not intended to include
class or collective actions as protected concerted activity.
In the dissent, Justice Ginsburg writes that she believes “the
inevitable result of today’s decision will be the underenforcement of federal
and state statutes designed to advance the well-being of vulnerable workers.” She continues that the Court’s decision
elevated the “FAA over workers’ rights” and “ignores the destructive
consequences of diminishing the right of employees to band together in
confronting an employer.”
Justice Ginsburg expressed concerns that employees will be
“disinclined to pursue small-value claims” if having to proceed one-by-one and,
“When workers charge their employers with unlawful conduct – in this case,
violations of laws governing wages earned and hours worked – there is strength
in numbers.” She also likened these
provisions to “yellow dog” contracts (deemed illegal in 1932) that required employees
to, as a condition to begin work, sign a contract agreeing to not join a union.
This Supreme Court decision could impact 25 million employees
as the percentage of employees with mandatory arbitration agreements has
increased from 2.1% of non-unionized employees in 1992 to 53.9% in 2018. It will also directly impact the 55 cases the
NLRB currently has pending.
The decision gives employers a way to reduce or eliminate the
threat of class and collective actions, especially under the FLSA, since
companies can compel employees to arbitrate workplace disputes individually
rather than as part of a class action. Supporters state that this will allow
the arbitration process to work as intended under the FAA, allowing all parties
to take advantage of a neutral arbitrator resulting in reduced legal fees and
Detractors such as the National Employment Law Project (NELP)
argue that these provisions hurt workers, particularly those who make low wages,
and create enormous barriers if employees have to bring claims alone since few
workers have the financial resources to pursue a case on their own.
Since all the cited cases were FLSA “wage-and-hour” cases,
this decision does not necessarily impact employees right to file class or
collective actions for discrimination complaints as, by definition, disparate
impact claims require proof of groupwide discrimination to show a pattern.
It should also be noted that the Supreme Court has granted cert
to review a Ninth Circuit decision (Varela
v. Lamp Plus, Inc.) regarding workers’ rights to arbitrate as a class
action when it is not specifically referenced in the arbitration agreement.
Additionally, this decision should not impact current or
future state laws prohibiting certain arbitration provisions or the use of
arbitration agreements in certain circumstances such as those in California and
What it means for you:
First, this decision does not change the fact that
arbitration agreements are not right for all employers or for all employment
claims. Every situation is different and
arbitration is not always the best course of action for every company. Requiring arbitration for all claims may not
be beneficial for either party.
This decision will not protect companies from action taken
under a poorly written arbitration agreement. Among some of the requirements to
be valid, an arbitration program and/or agreement cannot be one-sided in favor
of the employer and arbitrators must be neutral. Therefore, the agreement
should be drafted to specify the benefits an employee gets from mandated
arbitration, usually confidentiality and a quicker resolution.
Given the Supreme Court’s decision and interest in other
arbitration cases, as well as the recent passage of laws in certain states, you
should consider consulting your employment attorney if you have or are
considering an arbitration agreement for your employees.
Paige McAllister, SPHR, HR Compliance – Affinity HR Group, Inc.