Companies and individuals frequently enter into arbitration agreements requiring that claims be brought before a private arbitrator, rather than a judge and jury. Arbitration has various benefits: it can provide quicker resolutions, reduced costs, the right to participate in the selection of the arbitrator, and arbitral expertise. In addition, some parties prefer arbitration because it offers a cloak of confidentiality that does not exist in the state and federal courts.
In the employer-employee context, over 50% of non-union employment relationships now include agreements to arbitrate employment claims. Many of these agreements also prohibit the employees from bringing class or collective actions, which can allow employees to band together to pursue claims that might not be valuable enough to pursue on an individual basis.
On Monday, in Epic Systems Corp. v. Lewis, the United States Supreme Court held in a controversial 5-4 decision that these arbitration agreements do not run afoul of the National Labor Relations Act (NLRA).
The plaintiff employees in Epic Systems were required to sign arbitration agreements providing for “individualized” arbitration. The employees asked the Supreme Court to nullify these agreements on the ground that the agreements prohibited them from bringing class actions to enforce their employment rights—in their case, brought under the Fair Labor Standards Act (FLSA) and related state laws. The employees argued that their right to bring these class claims was protected by the NLRA, which confers upon employees the right to engage in “concerted activities.”
Justice Gorsuch, writing for the majority, rejected the employees’ arguments. He emphasized that the Federal Arbitration Act (FAA) “direct[s]” the courts to “respect and enforce the parties’ chosen arbitration procedures.” Were it to allow the NLRA to override the parties’ choice of individualized proceedings, the Court would “interfere with . . . arbitration’s fundamental attributes,”—namely, its “speed and simplicity and inexpensiveness.”
The NLRA does not outlaw agreements like these, Justice Gorsuch wrote, because it does not “express approval or disapproval of arbitration” or “mention class or collective action procedures.” Justice Gorsuch concluded that while the NLRA protects employees’ rights to engage in some types of concerted action, such as collective bargaining, it does not give them a right to bring class and collective actions in court when their arbitration agreements provide to the contrary.
Finally, Justice Gorsuch tossed aside the employees’ argument that the Court should defer to the National Labor Relations Board’s (NLRB) interpretation of the NLRA as prohibiting bans on class actions in employment agreements. Arbitration policy, he said, is not a matter that has been “implicitly delegated” to the NLRB. Moreover, the Board and the U.S. Department of Justice took different positions on the meaning of the NLRA, such that the government was speaking from “both sides of its mouth.”
In dissent, four justices called the decision “egregiously wrong.” The dissent, written by Justice Ginsburg, detailed the labor history leading to the NLRA, and criticized Justice Gorsuch’s position that collective litigation by employees was unknown when Congress passed the NLRA. In the dissent’s view, the “concerted activities” protected by the NLRA include the right to pursue collective litigation, such that “employer-dictated collective-litigation stoppers” are unlawful.
In the wake of Epic Systems, employers can confidently require employees to enter employment agreements providing for individualized arbitration to resolve disputes without fear that the Supreme Court or other federal courts will invalidate those agreements under the NLRA. According to Justice Ginsburg, “53.9 percent of employers require employees to agree to arbitrate their claims.” That number will almost surely increase as a result of the Supreme Court’s decision, and as a result, look for the number of employment class actions under the FLSA and other laws to dwindle. Also, there will be an immediate impact on 55 cases that are currently pending before the NLRB and that contain allegations that employers violated the NLRA because of class waivers contained in their arbitration agreements. Justice Ginsburg foresees threats to other sorts of employment class actions. In her dissent, she took preemptive action to defend Title VII claims requiring “proof on a group-wide basis,” writing that it would be “grossly exorbitant to read the FAA to devastate” such claims.
Justice Ginsburg also urged Congress to take action to preserve collective action in employment cases. That remains a possibility, although an unlikely one given the current Congress. Government regulators may also take a more active role in enforcing the FLSA and other employment laws if private class actions are diminished (though that too seems unlikely to be a Trump administration priority).
In future cases, courts are likely to grapple with Epic Systems’ impact on deference to agency interpretation, employees’ rights to pursue various kinds of class actions, and more. For now, however, employers have been given a powerful tool to force employees to arbitrate individual FLSA claims (no matter how small) one employee at a time.