In a landmark opinion on an important issue to employers, the Supreme Court held yesterday that employers can enforce class action waivers in arbitration agreements – leaving employers nationwide asking “what does this decision mean for us?” This post aims to answer that question.
This watershed decision is a victory for employers because it confirms that they can use arbitration agreements to avoid class and collective actions of employment claims. But such arbitration agreements are not a “one-size-fits-all” solution. Employers must consider what makes the most sense for their business interests, workforce, and culture moving forward. There are also related legal issues to consider.
The Court’s decision ruled on three separate cases: Murphy Oil USA Inc., Epic Systems Corp., and Ernst & Young. We will forego a lengthy legal analysis of the more than sixty pages of opinions by a closely divided court, and instead focus on what’s important to your leadership team: what are the considerations to keep in mind as you formulate your company’s approach?
How Does This Decision Impact My Agreements with Employees?
For employers that already have agreements containing arbitration as the selected means of dispute resolution, the question is whether to now include a class or collective action waiver either by (1) explicitly prohibiting class/collective claims; or (2) explicitly requiring that all claims be brought by employees individually and not jointly. Adding a class action waiver to an existing arbitration provision should not require heavy lifting from a drafting perspective, and doing so is likely an easy decision for many employers.
Whether you include a class waiver or not, now is as good a time as ever to revisit your existing arbitration provision more generally to make sure it (and any added class waiver) will be enforceable generally, as employees often have other avenues they can pursue to void certain contractual provisions (i.e. through unconscionability, fraud, duress or coercion-based arguments). Among other things, arbitration agreements must have certain procedural protections for employees, including making sure that the employee has affirmatively agreed to arbitrate any claims on an individual basis. So, a simple policy in your handbook may not always be sufficient. Having completed that review, you may simply decide to leave things status quo, taking comfort that your arbitration provision is enforceable. But for employers that have not reviewed their arbitration provisions for years, the law and marketplace have evolved over time, and these employers should act to modernize their agreements.
What Factors Should I Consider When Deciding Whether to Adopt an Arbitration Provision with a Class Action Waiver?
For those employers who do not rely on arbitration provisions, now is the time to decide whether to adopt one along with a class action waiver. In making this decision, employers should contemplate the following factors:
- Pros and cons of arbitrating employment disputes: is arbitration of a dispute always better than going to court? Arbitration has advantages and disadvantages. Among these are cost, privacy, timeline, and ability to appeal a decision. Whether any given factor is a pro or a con will depend on your company and the dispute at issue. Employers should not necessarily assume that individual arbitration is always the best way to go and we strongly recommend that you consult with your employment counsel on this issue.
- Company culture: what will be the impact on employee morale of injecting arbitration provisions and class action waivers into employee agreements? If imposing a company-wide arbitration/class action waiver requirement will adversely affect your current company culture to the extent where it will end up hurting your bottom line, then perhaps they should be implemented only for employees in certain positions, or not at all.
- Nature of workplace disputes: are the workplace claims your company typically faces of the sort that often are pursued via class action? For example, potential wage and hour claims will be well-suited to class or collective action. So, if your company employs a large number of non-exempt workers (i.e. eligible for overtime and other protections under wage and hour laws), the value of a class action waiver may outweigh any potential downside.
- Timing and messaging: if you decide to revise your agreements, when is the best time to do so and how should you communicate this change to current employees? Timing can be important. For example, it may be helpful to roll out agreements containing arbitration provisions and class action waivers when conducting annual code of conduct or other training, in connection with employee handbook distribution, during bonus time, or in the course of annual salary reviews.
- Market pressures: do other companies in your industry require employees to sign arbitration agreements and class action waivers? This could affect your ability to recruit and retain talent. In addition, do your company’s business partners and clients expect your company to have such agreements in place? Further, will your company suffer a public relations hit by imposing these requirements?
What is the Impact of State Law Prohibitions on Arbitration?
New York recently passed a law aimed at limiting an employer’s use of mandatory arbitration with respect to allegations or claims of sexual harassment. In addition, Maryland has now passed a law prohibiting employment agreements from including any provision that waives any substantive or procedural right or remedy to a future claim of sexual harassment. Given the momentum of the #MeToo movement and the sweeping legislative initiatives over the past several months, other jurisdictions may follow the lead of New York and Maryland. But a close reading of both laws reveals the absence of wholesale arbitration bans, and the laws account for the possibility that they could be struck down in the future as preempted by the Federal Arbitration Act (“FAA”). Thus, an open question remains as to whether these laws may withstand legal challenges in court and whether employers need to therefore move away from requiring arbitration of sexual harassment claims at this time. Another open question is Epic’s impact on representative actions under California’s Private Attorneys General Act (“PAGA”) brought in state court, in light of California state appellate decisions holding that employers may not compel arbitration of PAGA claims and holding that a complete PAGA waiver is unenforceable. Employers should track these legal developments closely because if these state-based arbitration laws withstand legal scrutiny, other jurisdictions may follow and their arbitration provisions may be subject to challenge.
How Broadly Can I Use These Waivers?
The Supreme Court has taken an expansive view of the FAA and would likely uphold the use of class or collective action waivers in the context of a variety of federal statutes beyond the Fair Labor Standards Act, including with respect to claims under Title VII of the Civil Rights Act of 1964. But that is not always the case, as some laws expressly prohibit the use of arbitration to settle disputes. Retaliation claims under The Sarbanes-Oxley Act of 2002 cannot be adjudicated via arbitration, and certain Department of Defense contractors and subcontractors cannot enter into or enforce these agreements with their employees under the Franken Amendment. Ultimately, arguments can be made for both sides of this battle and we can likely expect future court decisions over the impact of this ruling on civil rights claims.
Will Congress Step in?
The majority in Epic begins and ends its opinion by noting that Congress is always free to amend its legislation, essentially reminding us that at the end of the day this is a legislative issue involving interpretation of the FAA. Although there is no guarantee, given the current conservative political climate, it seems unlikely that Congress will be rushing to repeal or pass legislation in this regard. But that option remains on the table and therefore always has the ability to redirect the debate.