Since 2000, filings of multi-plaintiff wage and hour lawsuits have increased by more than 500 percent. With the proliferation of such disputes, employers across the country have deployed various pro-active measures to mitigate both the risk and exposure attendant to such actions. One such measure is the imposition of an employer-required arbitration program with class and collective action waivers.
Until this past Monday, the enforceability of arbitration programs with such waivers remained uncertain due to a split of authority between appellate courts for the Sixth, Seventh and Ninth Circuits – which held that arbitration agreements containing provisions that restrict employees' rights to pursue class and collective actions violate Section 7 of the National Labor Relations Act (NLRA) and are thus unenforceable under the Federal Arbitration Act (FAA) – and the Second, Fifth and Eighth Circuits, which held that such provisions were enforceable as written pursuant to the FAA.
However, following the Supreme Court's decision last week in Epic Systems Corp. v. Lewis, that uncertainty persists no longer. Employers can now reliably depend on the enforceability of their arbitration agreements, subject to the key takeaways set forth below.
Epic Systems Corp. v. Lewis
On May 21, 2018, in Epic Systems Corp., the Supreme Court upheld the enforceability of arbitration agreements containing class and collective action waivers of wage and hour disputes. In deciding the case – a consolidation of three separate matters before the Court – the majority, in an opinion authored by Justice Neil Gorsuch, held that the (i) FAA mandates the enforcement of arbitration agreements and (ii) right to pursue class or collective relief is not a protected concerted activity under Section 7 of the NLRA.
Now that Epic Systems Corp. has settled the enforceability of employer-mandated-arbitration programs once and for all, employers are asking: What should we do now? Our suggested considerations/next steps for employers are discussed below.
Legislative prohibitions and federal preemption
In the current #MeToo environment, several states have enacted laws that prohibit mandatory arbitration of sexual harassment cases. For example, the State of New York has recently enacted a law, effective July 11, 2018, which prohibits employers from requiring individuals to arbitrate claims of sexual harassment. Earlier this year, the State of Washington enacted a similar law voiding any employment-related arbitration provisions which require an employee to resolve discrimination claims in a confidential dispute resolution process, such as arbitration. The following states have considered or are considering similar legislation: Arizona, Indiana, Kansas, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, New Jersey, Pennsylvania, Rhode Island, South Carolina, Vermont and Virginia.
At the federal level, a bipartisan bill entitled The Ending Forced Arbitration of Sexual Harassment Act, which is currently pending in Congress, would prohibit pre-dispute arbitration agreements requiring arbitration of all sex discrimination claims, including sexual harassment.
Given the Supreme Court's pronouncement in Epic Systems, the above-noted state laws prohibiting arbitration of sexual harassment claims may be subject to challenge on grounds of federal preemption by the FAA.
Key takeaways for employers
(a) Employers with arbitration programs
For employers that currently have mandatory arbitration programs with class and/or collective action waivers in place, there is not much more to do. That said, employers are encouraged to review their mandatory arbitration program to ensure it contains nothing that is potentially unconscionable.
For example, arbitrary restrictions on the amount or type of discovery that can be sought in the arbitral forum should be revised so that a litigant's rights to pursue discoverable information are not unnecessarily constrained. Instead of imposing arbitrary limits, a better course may be to reference (and defer) to the rules applicable to arbitrations before an alternative dispute resolution service such as the American Arbitration Association or JAMS.
Employers should also review the process by which employees/new hires are requested to enter into the mandatory arbitration program to ensure there are no enrollment-related circumstances which constitute duress. For example, the withholding of certain compensation or benefits from employees that do not agree to execute an arbitration agreement could potentially constitute a form of economic duress. Such review is necessary to minimize the risk of rendering unenforceable an otherwise enforceable arbitration program due to the general contractual defenses noted in the majority opinion in Epic Systems.
Another consideration here is whether the agreement, as presently drafted, includes – and if it does, whether it should include – a so-called "delegation"provision whereby an arbitrator is delegated the exclusive authority to determine the enforceability thereof, including whether such agreement is unconscionable or procured by duress.
Employers that currently have voluntary (opt-out) arbitration programs in place should consider removing the opt-out provision. This would convert the arbitration program into one that is mandatory in nature. After Epic Systems, there is no longer a requirement to include an opt-out provision in order to have an enforceable arbitration agreement with a class/collective action waiver. Such employers should also review their arbitration program for both potential unconscionability and duress as set forth above.
Finally, employers with arbitration programs that do not include a class waiver provision should consider including such a provision going forward. To do otherwise creates a heightened risk of class arbitration, which is generally disadvantageous for two reasons. First, the arbitral forum is generally not equipped to handle the complexities of class arbitration. Second, an employer will forfeit its chance to litigate in its preferred forum in the event that its arbitration program lacks a class waiver.
(b) Employers without arbitration programs
Many companies have chosen to defer entry into arbitration programs (with/without class waivers) pending the outcome of the Epic Systems decision. Now that an employer-friendly decision has been rendered, those companies should reconsider whether to proceed with imposing an employer-mandated arbitration program or not.
As with all decisions, this decision will be employer-specific. Each employer must determine, for itself, whether the benefits of arbitration – procedural expediency, predictability of outcomes, the potential for reduced attorneys' fees and confidentiality – outweigh its detriments – reduced chance of prevailing on a dispositive motion (eg, motion to dismiss or summary judgment), limited appellate rights and the possibility of significant costs associated with the arbitration itself (depending upon the number of arbitrators involved and the fees charged by those arbitrators, which are often borne by the employer). In this regard, many plaintiffs' lawyers are of the view that the practical importance of the Court's decision in Epic Systems will ultimately be limited if employers are forced to defend dozens, or perhaps hundreds, of individual claims in arbitration in lieu of class or collective action proceedings, which could be prohibitively expensive in situations where the employer is responsible for the arbitration fees.
(c) Other arbitration-related considerations
With respect to any of the changes discussed in paragraph (a) above, employers should consider whether any such changes will apply to current employees or just to new hires. Employers will also need to consider whether any of the changes can be applied to any currently pending class or collective action matters. With sufficient and well-drafted notice, there may be an opportunity to impose a waiver on employees before a class is conditionally certified.
Finally, employers should consider the scope of claims to include in their arbitration program. Although Epic Systems dealt with the arbitrability of wage and hour disputes, the holding also likely extends to other employment-related disputes, such as discrimination and retaliation. Employers must determine whether to require that all employment-related disputes (inclusive of wage-and-hour matters) be handled in an arbitral forum or whether to limit arbitration to specific types of disputes (eg, only wage-and-hour matters). Relevant to this decision is the prevalence of the various federal and state legislative efforts to curb mandatory arbitration of sexual harassment claims in the wake of the #MeToo movement. Decisions may depend, in part, on the state of the law in the jurisdictions applicable to the employer's workforce.