On Friday, in a major victory for employers, the Second Circuit Court of Appeals fell into line with Supreme Court precedent and held that courts must enforce arbitration agreements that permit an employee to pursue claims under the Fair Labor Standards Act only through individual arbitration. In doing so, the Second Circuit repudiated its own previous decision holding that courts need not do so when it would cost the employee more to arbitrate the claim than he or she could hope to win.

The question at issue in Sutherland v. Ernst & Young LLP was the issue du jour in wage and hour litigation: whether an employee may contractually waive his or her right to pursue a wage and hour claim on a class-wide basis, and instead agree to seek redress only through individual arbitration. Accounting firm Ernst & Young LLP argued that the proposed wage and hour collective action was barred by the plaintiff’s execution of an agreement requiring her to submit her claims to individual arbitration. The plaintiff claimed that, even though she executed the agreement voluntarily, the agreement was unenforceable because it would have cost her more than 10 times the value of her individual claim to pursue the arbitration. Only if she could seek redress for a class of fellow employees would she have any economic incentive to litigate. The district court agreed with the plaintiff, following existing Second Circuit precedent.

On appeal, the Court of Appeals aligned with the other circuits that have addressed this issue, opining that class action waivers are generally enforceable. Such waivers, the court reasoned, are valid so long as the relevant federal statute does not, by its very terms, preclude enforcement. Because the FLSA says nothing about class action waivers, enforcement was appropriate. Additionally, the court noted that enforcement was appropriate because its decision did not altogether preclude the named plaintiff from recovering unpaid wages, but merely provided an alternative forum in which to proceed. Finally, the court rejected the plaintiff’s contention that the minimal value of an individual wage and hour claim warrants a different conclusion.

What Does This Mean for My Company

The Second Circuit’s decision reaffirms the federal policy favoring arbitration. Given the typical imbalance between the costs of arbitration and the relatively low value of individual wage and hour claims, arbitration agreements containing class relief waivers may serve to limit an employer’s exposure to wage and hour litigation. Accordingly, employers should determine if arbitration meets their business needs and, if so, contact counsel to determine whether inclusion of a class action waiver in employment agreements, and/or requiring existing employees to execute stand-alone arbitration agreements, is appropriate.