Alerts and Updates

Now that the Supreme Court has made clear that it is lawful for employers to require their employees to arbitrate their claims individually, it should be anticipated that the number of employers mandating arbitration and class action waivers will dramatically increase.

In a landmark decision, a divided U.S. Supreme Court ruled that employers can require their employees to arbitrate claims on an individual basis as a condition of employment. This means that employees can be required to arbitrate their claims instead of bringing them in court, and to waive the right to participate in class or collective actions.

Factual and Legal Background

In Epic Systems Corporation v. Jacob Lewis, No. 16-285, and two companion cases, Ernst & Young LLP v. Stephen Morris, No. 16-300 and National Labor Relations Board v. Murphy Oil USA, Inc., No. 16-307, the issue before the Court was whether the Federal Arbitration Act (FAA) permits employers to mandate that employees individually arbitrate their employment-related claims. In order to decide that issue, the Court also addressed whether Section 7 of the National Labor Relations Act (NLRA) creates a substantive right enabling employees to pursue class and collective actions.

Accordingly, these three cases involved interaction between the FAA, enacted in 1925, which provides for the enforcement of agreements to arbitrate claims, and the NLRA, enacted in 1935, which enables employees to form trade unions, bargain collectively and engage in other concerted activities. In recent years, the class and collective action litigation of employment disputes, such as under laws governing the payment of wages and prohibiting discrimination, has become prevalent. Neither statute, however, specifically addresses class or collective actions.

In each of these cases, the employer and employee entered into a contract that required the employees to arbitrate their work-related disputes on an individual basis only. However, each employee chose to litigate their Fair Labor Standards Act (FLSA) and related state law claims in federal court by way of a class or collective action. The employees contended that their right to participate in class and collective action lawsuits is guaranteed by Section 7 of the NLRA, which grants employees “the right… to engage in… concerted activities for… mutual aid or protection.” The employees also relied upon the FAA’s “saving clause,” which provides that a written arbitration agreement “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” (Emphasis added.) They asserted that the arbitration agreements were not enforceable under the FAA based upon the saving clause because the NLRA renders waivers of class and collective actions illegal.

The Court’s Ruling

In a 5-4 decision, the Court ruled in an opinion authored by Justice Gorsuch that: “The 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 reviewing the intent of Congress in the passage of the NLRA and FAA, the Court found that through the FAA, “Congress has instructed federal courts to enforce arbitration agreements according to their terms—including terms providing for individualized proceedings.”

As to the employees’ savings clause argument, Justice Gorsuch quipped that it “can’t save their cause.” The Court explained that a fundamental attribute of arbitration is its informality, which is incompatible with class proceedings. Accordingly, the contention that the arbitration agreement was unenforceable on the grounds that it required arbitration on an individual basis “impermissibly disfavors arbitration.” The Court held that the savings clause was inapplicable, because it recognizes only defenses that apply to any contract—not only arbitration agreements.

Significantly, the Court also held that Section 7 of the NLRA does not provide employees with the right to bring class or collective action claims. The Court reasoned that Section 7’s clear purpose is to protect group activity in the workplace, such as the right to organize unions and bargain collectively, not group legal action in court or arbitration.

Strongly Worded Dissent

The dissent, authored by Justice Ginsburg, called the majority opinion “egregiously wrong,” and maintained that Section 7’s language and intent provide employees with the right to pursue class and collective action claims against their employers. Justice Ginsburg reasoned that the 1925 FAA predated federal labor laws such as the FLSA and was not intended to provide for the enforcement of “arm-twisted,” “take-it-or-leave it” agreements mandating that employees arbitrate on an individual basis. The dissent stated that because workers’ claims are usually small, and many workers fear retaliation, relatively few workers avail themselves of the arbitration option, and warned that the inevitable result of this decision will be a major under enforcement of federal and state laws designed to advance the well-being of vulnerable workers. While the dissent noted that the Court’s ruling would not apply to discrimination claims “asserting disparate-impact and pattern-or-practice claims that call for proof on a group-wide basis,” it does not appear that the majority decision made any distinction between such claims and the FLSA claims that were the subject of the cases before the Court.

What the Decision Means for Employers

Now that the Supreme Court has made clear that it is lawful for employers to require their employees to arbitrate their claims individually, it should be anticipated that the number of employers mandating arbitration and class action waivers will dramatically increase. All employers should consider whether and to what extent to require that their employees agree to arbitrate their claims on an individual basis, as a condition of employment.

In deciding whether to require arbitration, there are numerous factors to consider in addition to the very significant advantages of avoiding costly class and collective actions. For example, while arbitration is typically less formal, faster and less expensive than court litigation, it may be more difficult to obtain summary judgement in arbitration. In addition, the grounds for appealing an adverse arbitration award are very limited. There are also potential employee and public relations issues to consider. Some major employers have recently announced that they will not enforce existing contract terms requiring the arbitration of sexual harassment claims. Similarly, some employers now adopting mandatory arbitration programs may decide to exclude certain claims, such as sexual harassment.

Both the majority opinion and the dissent highlight the potential for legislation addressing mandatory arbitration. Earlier this year, the attorneys general in all 50 states signed a letter submitted to Congress supporting legislation that would outlaw mandatory arbitration of sexual harassment claims. The proposed federal Ending Forced Arbitration of Sexual Harassment Act would, among other things, invalidate agreements (predispute) requiring the arbitration of sex discrimination disputes. Legislative developments at the state and federal level are likely forthcoming. For example, effective July 11, 2018, the New York State Budget Bill for Fiscal Year 2019 renders “null and void” agreements requiring the submission of sexual harassment claims to mandatory binding arbitration—except: (1) “where inconsistent with federal law” or (2) as part of a collective bargaining agreement. However, this and similar state restrictions on arbitration agreements are likely to be preempted by the FAA. It should also be noted that the Epic decision does not appear to impact actions to recover civil penalties under the California Private Attorneys General Act (PAGA), which allows employees to represent other current and former employees on behalf of the state of California for alleged California Labor Code violations. The issue of whether PAGA actions to recover underpaid wages are actions to recover civil penalties and therefore not subject to mandatory arbitration is currently before the California Supreme Court. Other states are considering enacting similar legislation.

Lastly, while the Supreme Court has held that agreements requiring mandatory arbitration on an individual basis are lawful, that does not mean that all agreements are enforceable. Agreements to arbitrate will remain subject to challenge, as would any other contracts, on grounds such as lack of proper offer and acceptance, lack of consideration, fraud, duress or that its terms or the manner in which it was presented are unconscionable. Employers must pay careful attention to whether the agreement is properly drafted and entered into, particularly when email is used, as these factors will determine whether a particular agreement is enforceable.