Can you prevent employees from pursuing class actions if you have the right employment agreement? Employment agreements routinely include arbitration clauses that require employees to waive their right to pursue work-related claims through collective or class actions. Instead, employees agree to resolve disputes through individual arbitration. But the validity of these arbitration clauses is unclear and is now before the United States Supreme Court. The Supreme Court heard oral argument earlier this week in National Labor Relations Board v. Murphy Oil, USA, Inc. and two other consolidated cases about whether such clauses violate the National Labor Relations Act (which governs employer-employee relations) or whether the Federal Arbitration Act (which governs arbitration agreements) trumps the NLRA.

The cases that the Supreme Court is reviewing come out of the Fifth, Seventh and Ninth Circuit Courts of Appeal. The Fifth Circuit held that an employer lawfully enforced an arbitration clause in its employment agreement and did not violate the NLRA. The Seventh and Ninth Circuits held the opposite—finding similar arbitration clauses unenforceable because the NLRA prohibits class waivers in employment agreements.

Employment contract arbitration clauses are currently enforceable in the Second, Fifth, and Eighth Circuits (shown in green below) and unenforceable in the Seventh and Ninth Circuits (shown in red below).

The Supreme Court’s decision in Murphy Oil is worth watching. If the Supreme Court holds that these arbitration clauses do not violate the NLRA (or that the FAA overrides the NLRA), employees who have signed such clauses will be required to litigate employment-related disputes on an individual basis before an arbitrator. Conversely, if the Supreme Court finds that these clauses violate the NLRA, employees can pursue lawsuits on a collective or class basis, notwithstanding an employment agreement that purportedly waives such rights.

How Best to Structure Arbitration Clauses

Employers can likely avoid these issues entirely with careful drafting of their employment agreements. In particular, if an employment agreement gives an employee the opportunity to “opt out” of the agreement (thus making the agreement voluntary, not mandatory), an arbitration clause and class action waiver is likely enforceable. An opt-out clause should clearly inform the employee of their right to opt out of arbitration and also require the employee to affirmatively notify their employer of their desire to opt out. Ironically, allowing employees the option to resolve employment-related disputes in arbitration may help defend a later challenge to the enforceability of the arbitration agreement if the employee had the option to “opt out” but chose not to do so.