Let’s face it: for employers, class and collective actions are a serious bummer. While compliance is key for avoiding mass claims, pursuing class and collective actions is a “business,” and even the most compliance-oriented employers are frequent targets. But while becoming a defendant may seems inevitable, the opportunity to have a reliable, defensible employee waiver of class and collective actions may be upon us, at least if the Supreme Court continues to issue its dramatically pro-arbitration rulings of late.
If you are an employer prone to ending up on the wrong end of a class or collective action, shouldn’t you at least be considering a mandatory arbitration process that includes a class and collective action waiver?
Is it Legal and Effective?
Well, not quite legal or guaranteed effective in all cases yet, but don’t stop reading. While the law today, at least according to some courts and agencies, remains a barrier, the Supreme Court has published a series of decisions — most recently American Express Co. v. Italian Colors Restaurant — strongly supporting the notion that the Federal Arbitration Act trumps state and even federal rights to participate in a class or collective action. The Supreme Court’s declared support for mandatory arbitration as a means of dispute resolution, especially as clarified and refined in the last two years, has been remarkably strong. In fact, in American Express, the Court held that a class action waiver in an arbitration agreement is enforceable even if it would have the effect of making it foolish for a plaintiff to even pursue the individual claim from a financial perspective. As summarized by Justice Kagan in her dissent, even though an arbitration agreement containing a class action waiver may effectively deprive the plaintiff of legal recourse because the costs outweigh the value of the claim, that is “too darn bad,” based on the Court’s majority decision.
While the American Express case is not an employment case, many believe the Court wrote its opinion in a way that sets a clear course for the Fifth and Second Circuits, and even the California Supreme Court. Each of those courts is considering various challenges to employment arbitration agreements with class action waivers. Specifically,
- The Second Circuit is considering whether FLSA collective actions can be waived, in Rainere v. Citigroup, Inc.
- The Fifth Circuit is considering the National Labor Relations Board’s decision in D.R. Horton that a class and collective action waiver violates employees’ Section 7 rights to engage in concerted activity. That means that as of today, class and collective actions violate the National Labor Relations Act. But many federal courts have refused to invalidate agreements on this basis, and the Horton decision remains vulnerable to attack not only on the merits, but also because it was issued at a time when the Board — according to the D.C. Circuit’s decision in Noel Canning — did not have a valid quorum of members due to alleged faulty recess appointments.)
- The California Supreme Court, in Iskanian v. CLS Transport, will rule on whether state public policy and statutory schemes that contemplate collective actions — like the Private Attorney General Act — are trumped by the Federal Arbitration Act. Most California federal courts have said so, but state courts have been reluctant to make such a finding. As many as 14 amici briefs have been filed.
A more detailed description of the state of the law, can be found in this Strategy & Insights piece, HERE.
What You Can Do:
While watching these important developments, employers should consider other pros and cons associated with implementing a mandatory arbitration program with class and collective action waivers. These include:
- Potentially eliminates class actions for wage and hour and employment discrimination claims. Even in California. Killer waive, dude.
- Lower risk of runaway jury verdicts.
- Generally less publicity with arbitration.
- Motion practice: (Employees may proceed with litigation regardless of the waiver, requiring a motion to compel arbitration or potential challenges to the enforceability of the arbitration agreement.)
- Agencies: (An arbitration policy can’t prevent the EEOC or the DOL from bringing suit.)
- Expense: (Private arbitrators can be expensive and the process can be time-consuming.)
- “Split the baby”: (Some arbitrators try to make things “even” versus following the law as closely, resulting in both sides walking away unhappy.)
- Evidence: (Arbitrators are more likely to allow hearsay and irrelevant witnesses.)
- Appeal: (Judicial review is very limited.)
For a full discussion of these pros and cons, see the Strategy & Insights piece noted above.
In deciding whether to ride the “waive” of arbitration-friendly decisions, employers may want to think about some of the following:
- Have you been sued in a class or collective action before? If so, the possible avoidance of future class or collective actions may outweigh the risks that come along with arbitration.
- Is your workforce unionized, or is your business particularly vulnerable to organizing activity? With D.R. Horton – still in effect, waiting out that appeal may be an attractive option at this time.
- How many employment-related lawsuits do you typically get in a year? Arbitration could reduce your overall employment litigation costs.
- Is your company’s philosophy to settle lawsuits or to fight them to the bitter end? If the latter, arbitration is generally better.
- In which jurisdiction is your company typically sued? If it’s a jurisdiction that isn’t employer-friendly, then arbitration is usually the better option.
If you ultimately decide that you want to implement an arbitration program, here are some things to keep in mind:
- Consideration. The arbitration agreement needs to have consideration (basically, an exchange of promises) to support it. Some states don’t recognize continued employment as sufficient consideration, so if you’ll be asking current employees to sign an arbitration agreement, you might need additional consideration. A good way to prove adequate consideration is to make the obligation to arbitrate mutual, meaning that the employer agrees to arbitrate any claims it might have against the employee. It’s also important to be cautious about including language that reserves the right to modify or revoke the policy at any time; that can make the agreement susceptible to a challenge that the agreement to arbitrate is illusory.
- Fairness. The agreement should clearly specify what claims are covered, the time allowed to bring a claim, and the process to be followed. We also recommend that the agreement allow for meaningful discovery and the recovery of all types of relief that would be available in court.
- Class Action Waivers. If you choose to include one, make sure it’s clear and conspicuous and that it explicitly prohibits arbitrators from presiding over class, collective, or other representative claims. It’s also a good idea to include severability language that makes clear that in the event the class waiver is found unlawful or unenforceable, then the only forum for such an action would be court, not arbitration.
- Carve-Outs. To maximize the likelihood that the arbitration agreement will survive challenge, it is a good idea to include language carving out the right of employees to file workers’ compensation claims, unemployment compensation claims, and charges with administrative agencies (EEOC, NLRB, DOL). If your company has contracts with the Department of Defense in excess of $1 million, you will likely be required to exclude any claims under Title VII or any tort related to sexual harassment.
If you’re not sure about implementing an arbitration program, don’t despair. Other creative options can exist independent of – or in conjunction with – an arbitration program:
- Establish a formal internal dispute resolution procedure that allows for multiple steps of review and final appeal to a high-ranking member of management.
- Establish a binding peer review board that would provide a forum for employees to resolve disputes and issues.
- Develop an Ombudsman program for receipt, investigation, and review of employee complaints.
- Provide an appeal process as part of employee evaluations and/or discipline.
- Develop a pre-termination review process that includes multiple sign-offs and an opportunity for internal appeal before final decisions are made.