Coerced Arbitration Agreement Not Enforceable in FLSA Collective Action

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Executive Summary:  The Eleventh Circuit has affirmed a district court's decision denying an employer's motion to compel the arbitration of a Fair Labor Standards Act (FLSA) collective action, finding that the court's decision was within its authority to manage such actions. The arbitration agreements supporting the motion to compel arbitration were signed after the FLSA collective action was filed. In denying the motion to compel, the district court held that the arbitration agreements were unconscionable and that there was a record of abuse in obtaining the agreements. See Billingsley v Citi Trends, Inc., 560 Fed Appx. 914 (11th Cir. 2014).

Background

In 2012, two store managers brought a collective action against their employer under the FLSA, claiming they were improperly classified as exempt and improperly denied overtime pay. After the suit was filed, the parties participated in a conference on a proposed schedule and the process for the conditional pursuit of a collective action, including notification of similarly situated managers and opt-in rights.  A further conference with the court was scheduled, and the district court provided for a briefing schedule.

Subsequently, one of the managers filed a motion for conditional certification of the collective action. In response, the employer filed copies of signed arbitration agreements that were obtained in April 2012, after the initial FLSA complaint filings with the court.  The employer argued that managers who signed the arbitration agreements were excluded from the collective action. The managers challenged the employer's actions in obtaining the arbitration agreements, which provided for individual but not collective actions, and asked the court for a corrective order.

Lower Court Decision

The district court characterized the employer's behavior in obtaining the arbitration agreements as "back-room meetings that were ‘highly coercive' and ‘Interrogation-like'."  The court made certain findings of fact, including that the employer implemented its ADR policy in the late spring and early summer of 2012, after service of the complaint in the original action and after the court scheduling conference in May 2012.  The ADR policies contained mandatory agreements to arbitrate all disputes individually rather than collectively and were provided to the managers by the company's human resources representatives in a series of individual meetings styled as the issuance of a new employee handbook.  The managers were asked to sign the agreements during the meetings.  The court found that the arbitration agreements were unconscionable as a matter of law and, accordingly, denied the motion to compel arbitration.  Further the court found that there was a record of abuse in the manner of procuring the arbitration agreements and that its managerial responsibility to oversee party joinder in FLSA collective actions required it to correct the effect of the company's misconduct.  On appeal the Eleventh Circuit affirmed.

Eleventh Circuit's Decision

The Eleventh Circuit noted that the FLSA gives district courts the authority to manage collective actions after a claim has been brought.  This authority is broad and includes the oversight of notices to employees who will receive information about the lawsuit, as well as the conduct of counsel and parties during the notice process. Additionally, district courts have authority to prevent confusion and unfairness concerning notice and handling of an FLSA collective action:

The district court also has the responsibility to [e]nsure that all parties act fairly while the court decides whether and how the action will move forward under the FLSA.

[T]he district court did not abuse its discretion in determining that Citi Trend's conduct in the summer of 2012 undermined the court's authority to manage the collective action. Nor did the district court abuse its discretion in determining that – to correct the effect of Cit Trends's misconduct – it would allow putative collective action members to join the lawsuit notwithstanding their coercive signing of the arbitration agreements.

The Eleventh Circuit also held that, as part of the management of the FLSA lawsuit, the district court had the authority to remedy the company's misconduct, which it characterized as improper communication to potential class members.  Specifically, the Eleventh Circuit held:

The district court did not abuse its discretion in correcting the effects of… improper behavior… The district court held an initial hearing, after which it denied [the] motion to compel arbitration.  The court then reconsidered its order, held an additional two-day evidentiary hearing, made specific and detailed findings of fact that were supported by the record, and took minimal action to correct the effects of Citi Trends's conduct.

The court specifically said that it was not ruling on the enforceability of the arbitration agreements as they relate to other cases or controversies [and]… did not restrict Citi Trends from entering into new arbitration agreements with the store managers; nor did the court prevent store managers from electing to comply with the terms of the arbitration agreements that they signed in the summer of 2012.

In a footnote the Eleventh circuit stated:

The district court's "managerial responsibility" rationale for not compelling arbitration did not relate to the substantive validity of the arbitration agreements.  Instead, the district court's "managerial responsibility" rationale addressed, as a procedural matter whether and how the district court can regulate an employer's attempt to impose an arbitration requirement and waiver of legal rights during the course of an FLSA collective action lawsuit.  Thus, our affirmance of the district court's exercise of its managerial discretion does not require us to determine whether the district court lacked authority to consider issues related to the arbitration agreements' enforceability or formation.

Employers' Bottom Line: The court's decision provides insight into the extent of a district court's authority in managing FLSA collective actions. It also illustrates the risks of requiring employees to enter into arbitration agreements after a collective action has been filed.

Topics:  Arbitration, Arbitration Agreements, Collective Actions, Employer Liability Issues, FLSA

Published In: Alternative Dispute Resolution (ADR) Updates, Civil Procedure Updates, General Business Updates, Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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