A Chicago federal appellate court has ruled that employer-employee agreements that require mandatory individual arbitration and forbid class or collective recovery are unlawful as they violate employee ability to engage in “concerted activity,” which is protected by the National Labor Relations Act (NLRA). This is the first appellate court decision to adopt the logic of the National Labor Relations Board on this issue, but the decision is contrary to every other federal appellate court that has rendered a decision thus far. Employers can expect that the Supreme Court of the United States will weigh in on whether mandatory arbitration clauses in their employee handbooks violate the NLRA shortly.

The case before the Chicago court (Lewis v. Epic Systems Corp., 15-2997 (May 26, 2016)), involved an employer agreement imposing a mandatory arbitration agreement that barred employees from seeking non-individual remedies to wage-and-hour disputes, such as class, collective or representative relief in court. In deciding that this particular policy was unlawful, the appellate court held that the company’s arbitration waiver interfered with the NLRA’s protection afforded to employees who engage in “concerted activity.” Specifically, the agreement explicitly mandated that employees “waive the right to participate in or receive money or any other relief from any class, collective, or representative proceedings” and defining “covered claims” as any “claimed in violation of wage-and-hour practices or procedures under local, state, or federal statutory or common law.”

Section 7 of the NLRA provides that employees shall have the right to engage in “concerted activities for the purpose of collective bargaining or other mutual aid or protection” (29 U.S.C. § 157). While these activities are not defined by the NLRA, the Chicago appellate court looked directly to congressional intent in enacting such a law. The purpose of the NLRA, the court noted, was to “equalize the bargaining power of the employee with that of his employer.” Collective, representative and class legal remedies “allow employees to band together and thereby equalized bargaining power.” The agreement, which waived precisely this power, was unenforceable.

Despite the Seventh Circuit’s revocation of the arbitration clause, these agreements are still widely used and encouraged in employment contracts and handbooks. As many employers are well aware, the costs of arbitration are often far less than litigation, and may give rise to more efficient, flexible and quicker results. In the meantime, while this issue is being conclusively determined, employers in Illinois, Indiana and Wisconsin (the jurisdiction of the Chicago court) are wise to reconcile such arbitration clauses with the appellate court’s Lewis decision, and should avoid any waiver of collective or class procedural remedies, or mandate of solely individual-based relief, and simply compel arbitration, on any basis, for resolving any employment-related matters.