Today, in a significant decision for employers nationwide, a divided United States Supreme Court held in a trio of cases that employers may require employees—as a condition of employment—to enter into arbitration agreements that contain class or collective action waivers.
Background on the Dispute
Over the past decade, employers have seen a tremendous increase in class and collective actions, particularly in wage and hour cases under the Fair Labor Standards Act. The disruption to an employer’s business can be immense when defending these actions, regardless of the merits of the case.
As a result, many employers have adopted arbitration agreements as a condition of employment that include class and collective action waivers. Under these agreements, employees and employers mutually agree that any dispute between them will be resolved through arbitration, rather than in court, and employees also agree that their claims will be heard only on an individual basis and not in a class or collective action.
For years previous to today’s high court ruling, the National Labor Relations Board (NLRB) issued decisions in unfair labor practice cases holding that class and collective action waivers in mandatory employee arbitration agreements were unenforceable under the National Labor Relations Act (NLRA). Specifically, the NLRB took the position that an agreement between employers and employees requiring employees to litigate disputes solely on an individual basis violates Section 7 of the NLRA, which protects employees’ rights to engage in “concerted activity” to improve wages or work conditions.
Several U.S. Courts of Appeal rejected the NLRB’s position in various decisions between 2012 and 2015, but the NLRB and other employee advocates remained undeterred and continued to press their argument in various forums. The landscape changed in 2016 when the Seventh Circuit Court of Appeals agreed with the NLRB, holding that protected concerted activity under the NLRA included the filing of a class or collective action, and that mandatory class or collective action waivers violated the NLRA. The Sixth Circuit and Ninth Circuit followed suit, also finding class and collective action waivers in mandatory employment arbitration agreements unlawful under the NLRA, resulting in a deep and decisive circuit split.
On January 13, 2017, the high court granted certiorari (review) in a trio of cases in order to resolve the split (Epic Systems Corp. v. Lewis, Case Number 16-285; Ernst & Young LLP et al. v. Stephen Morris et al., Case Number 16-300; NLRB v. Murphy Oil USA Inc., Case Number 16-307).
In a 5-4 decision, the Supreme Court held that employers are not violating the NLRA if they require class and collective waiver provisions in arbitration agreements that employees must sign as a condition of employment.
Writing for the majority, Justice Neil Gorsuch explained that mandatory arbitration agreements have to be enforced under the Federal Arbitration Act (FAA) and that the FAA is explicit in its instruction that courts enforce arbitration agreements according to their terms: “Congress has instructed in the Arbitration Act that arbitration agreements providing for individualized proceedings must be enforced, and neither the Arbitration Act’s saving clause nor the NLRA suggests otherwise.” The opinion added, “[t]he policy may be debatable but the law is clear: Congress has instructed that arbitration agreements like those before us must be enforced as written.”
In the majority’s view, Section 7 of the NLRA does not create a right to pursue a collective or class action. Rather, Section 7 focuses on the right to collectively bargain and organize, and language regarding class or collection action procedures is absent from the NLRA’s mandate. Moreover, the majority noted that class and collective action procedures were “hardly known” in the 1930s when the NLRA was passed.
Justice Ruth Bader Ginsburg issued a dissenting opinion, which Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan joined. In an uncommon move, Justice Ginsburg read her dissent from the bench, calling the decision “egregiously wrong,” and asked for Congress to step in to update federal labor law. “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,” Justice Ginsburg said.
Why the Decision Matters for Employers
This decision settles the Supreme Court’s view on the viability of class and collective action waivers in mandatory arbitration agreements, falling squarely on the side of employers. While there is still room for Congress to act on this issue, there seems to be little political appetite for legislative action to change the FAA at this time. Absent any new legislation amending the FAA, courts will generally be required to enforce mandatory employment arbitration agreements that include class and collective action waivers. That said, arbitration agreements are still subject to the same arguments that may invalidate any contract, such as fraud, duress or unconscionability.