Second Circuit Enhances Employers’ Ability To Avoid FLSA Collective Actions Through Arbitration Agreements

Sutherland v. Ernst & Young LLP, No. 12-304 (2d Cir. Aug. 9, 2013): In a significant victory for employers, the Second Circuit Court of Appeals endorsed class waivers of Fair Labor Standards Act (FLSA) claims even if such waiver removes the financial incentive to pursue individual wage and hour claims. The holding reversed the U.S. District Court for the Southern District of New York and was consistent with the recent decision by the U.S. Supreme Court in American Express Co. v. Italian Colors Restaurant, which held that the Federal Arbitration Act does not permit courts to invalidate a contractual waiver of class arbitration on the ground that the plaintiff’s cost of individually arbitrating a federal claim exceeds the potential recovery. 

In reaching the Sutherland decision, the Second Circuit recognized that the FLSA does not contain any contrary congressional command barring waivers of class arbitration. Relying on American Express, the Second Circuit held that a plaintiff cannot use the so-called “effective vindication doctrine” to invalidate a class-action waiver provision by showing that it makes no economic sense to pursue an FLSA claim individually in arbitration. Indeed, the plaintiff in this case argued that, if forced to arbitrate under the relevant waiver provision, she would have to expend approximately $200,000 to recover less than $2,000. Sutherland thus makes plain that the Second Circuit will not invalidate a class-action waiver provision solely if the cost of individual wage and hour arbitration would far exceed the recovery sought. This decision shows the Second Circuit joining the growing trend among circuit courts to permit class-action waivers of FLSA claims. Given the potential exposure and litigation costs in defending against class wage and hour actions, it is strongly recommended that employers consider entering into arbitration agreements that contain class waivers of FLSA claims.

Note: This articles was published in the August 2013 issue of the New York eAuthority.