On May 21, 2018, in a 5-4 decision, the United States Supreme Court held, in Epic Systems Corp. v. Lewis, that arbitration clauses in employment contracts requiring individualized proceedings are enforceable and thereby preclude employees from bringing collective or class action suits regarding workplace claims. The employee plaintiffs sought to litigate Fair Labor Standards Act and related state law claims through class or collective actions in federal court, arguing that the individual arbitration clauses were not enforceable on the basis that the requirement of individualized proceedings violated the National Labor Relations Act (NLRA) and that the Federal Arbitration Act’s (FAA) “savings clause”—which allows courts to refuse to enforce arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract”—removes an obligation to enforce arbitration agreements as written if the arbitration agreement violates some other federal law. The employer defendants countered by arguing that the FAA protects agreements requiring arbitration from judicial interference and that neither the FAA’s savings clause nor the NLRA demands a different conclusion. The Court’s majority agreed with the employers.
This decision, a win for employers seeking to enforce arbitration clauses in employment agreements, struck a major blow to employment-related class and collective action litigation.
The Decision and Its Immediate Impact
In 2012, the National Labor Relations Board (NLRB) ruled that arbitration agreements containing class action waivers violated Section 7 of the NLRA, which guarantees workers the right to self-organize, to form labor organizations, to bargain collectively and to “engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” In its ruling, the NLRB found that requiring employees to arbitrate their claims on an individual basis violated the NLRA, rendering these agreements invalid and unenforceable. Since the Board’s decision, the federal appellate courts have split on the issue, with some circuit courts, including the Seventh and Ninth Circuits, agreeing with the NLRB, while other circuit courts, including the Fifth Circuit, finding such class action waivers to be enforceable and not in violation of the NLRA.
Addressing this split among the circuits, the Supreme Court’s decision in Epic Systems makes clear that an arbitration clause in an employment agreement that provides for individual proceedings and waives a class or collective action is legal and enforceable. The Court refused to infer that class and collective actions are the types of “concerted activities” Section 7 of the NLRA protects that cannot be waived by an arbitration agreement. Specifically, in the majority opinion, Justice Gorsuch interpreted “other concerted activities” to be limited by the types of concerted activities that precede it in Section 7, which describes ways in which employees can organize and bargain collectively in the workplace. These activities, the Court held, are unrelated to class or collective action procedures.
Moreover, the Court rejected the contention that the savings clause in the FAA makes arbitration clauses requiring individual arbitration proceedings unenforceable. The FAA savings clause provides that an agreement requiring an individual “to submit to arbitration on an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” With respect to this provision, the Court explained that the purpose of the savings clause is not to save legal or equitable defenses that target arbitration in particular, but rather to preserve defenses that apply to any contract, such as fraud, duress or unconscionability.
In response to the Court’s interpretation that class and collective actions are not the types of “concerted activities” Section 7 of the NLRA protects, some law firms representing employees have suggested that they will be willing to file multiple individual claims that are substantially identical, in lieu of class actions.
Potential Impact on ERISA Claims
While not an ERISA case, this decision leaves open questions for plan sponsors, administrators and fiduciaries surrounding the interaction between arbitration agreements and fiduciary breach claims under ERISA, which are brought by employees on behalf of a plan. Following this decision, can employers bind employees to arbitrate these types of claims? California courts have held that these claims cannot be arbitrated because only the employee, and not the plan, signed the arbitration agreement. If a circuit split arises on this point, it may pave the way for the Supreme Court to take up the issue of whether fiduciary breach claims are subject to the Epic Systems decision.
The following are some suggested actions companies should consider when implementing arbitration clauses and class action waivers in employment agreements:
- Employers who have relied on an optional arbitration provision may wish to consider revising the agreement to include a mandatory arbitration provision.
- Employers may wish to include a provision expressly waiving class and collective action claims.
- Employers may wish to remove from arbitration agreements language suggesting that the NLRB overrides the enforceability of arbitration provisions.
- Employers may face some uncertainty concerning state statutory and common-law contract interpretations that may be invalid under Epic Systems until cases challenging these state-law matters are decided in court. For example, several states, including New York, have recently enacted limits on arbitration agreements that relate to sexual harassment claims, and some state courts have imposed exacting contractual wording requirements before enforcing arbitration clauses that waive the right to proceed with a court action. It is possible that Epic Systems could be used to challenge these limits and requirements.
- The Epic Systems decision does not preclude lawsuits challenging arbitration agreements on general contract grounds, such as fraud, duress or unconscionability, so employers should continue to be diligent about the general enforceability of their arbitration agreements.