The U.S. Court of Appeals for the Second Circuit recently took a significant step toward bringing uniformity to the law of class and collective action waivers under the Fair Labor Standards Act (FLSA). 

In Sutherland v. Ernst & Young LLP, the court held that employees can be contractually compelled to arbitrate their claims on an individual basis, and thereby waive their right to participate in a FLSA collective action. The decision is another in a series of cases that have required employees to arbitrate employment-related claims on an individual basis when they have clearly agreed to do so.

A little background is in order. In its 2011 decision in AT&T Mobility LLC v. Concepcion, the U.S. Supreme Court held that, under the Federal Arbitration Act (FAA), states must enforce arbitration agreements even when the agreement requires individual, and not class action, arbitration. The Court found that states may not apply generally applicable contract defenses, such as unconscionability,” in a way that “disfavors arbitration.” 

Foreshadowing the direction of the law on this issue, in March of this year, the Second Circuit in Parisi v. Goldman, Sachs & Co., reversed a district court decision that had held that an employment agreement’s express “preclusion of class arbitration would make it impossible for [plaintiff] to arbitrate a Title VII pattern-or-practice claim, and that consequently, the clause effectively operated as a waiver of a substantive right under Title VII.” The court noted a few exceptions to the liberal policy favoring arbitration, in which the costs associated with the actions are prohibitive and preclude plaintiffs from bringing such claims. This is known as the “effective vindication” doctrine. The court observed that the doctrine was inapplicable in employment discrimination litigation.

In June, the U.S. Supreme Court issued its decision in American Express Co. v. Italian Color Restaurant, which addressed the issue of whether the “effective vindication” doctrine precluded class arbitration waivers in the antitrust context where expert testimony is required and therefore, it was argued, would be prohibitively expensive for individuals to pursue without the availability of class arbitration. The Court held that the FAA does not permit courts to invalidate a contractual waiver of class arbitration on the ground that the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery.

That brings us to Sutherland, and the question of whether these legal developments that apply to other types of class actions apply equally to FLSA collective actions, where the amounts at issue for each individual member of the potential class may indeed be much smaller than in a typical discrimination case. As a condition of employment, Sutherland had agreed to “binding arbitration … on an individual basis only.” She later filed a collective action under the FLSA. 

In its pre-Concepcion decision, the district court invalidated the agreement because plaintiff demonstrated that the waiver essentially resulted in her inability to assert the claims. The court reasoned that Sutherland, because of the small amount of potential individual recovery, (a) would not pursue her claims individually provided the high costs of litigation and (b) would be unable to obtain legal representation for such a small claim, which could be obtained on a class basis. 

Post-Concepcion, the employer moved for reconsideration, but the motion was denied. The court reasoned that the applicability of Concepcion was a “close question” but reconfirmed its view that Sutherland was unable to vindicate her rights on an individual basis. That decision was in conflict with other district court decisions within the Second Circuit under the FLSA, which had found that Concepcion was contrary to any argument that an absolute right to collective action is consistent with the FAA, and instead concluded that plaintiffs could be required to pursue their claims on an individual basis in arbitration. 

The Second Circuit has now subscribed to the same view, finding that the reasoning of the Supreme Court’s decision in Italian Colors abrogated the district court’s basis for invalidating the collective action waiver at issue. The court observed that there was no “contrary congressional command” requiring class-wide arbitration in the FLSA context, and that the recent Supreme Court decisions on class waivers pointed to the same conclusion. The court noted that a substantial majority of circuit and district courts had already concluded that the FLSA does not preclude the waiver of collective action claims. 

Pursuing FLSA claims in a collective action is not a “right;” it is a contractually waivable procedural mechanism that does not prevent an individual from effectively vindicating his or her claims for unpaid overtime wages on an individual basis through arbitration. The Second Circuit’s Sutherland decision therefore opens the door further to employers to draft broad class and collective action waivers in their handbooks and employment agreements that include FLSA claims and require such claims to be pursued in individual arbitrations.