A Significant Victory For Employer Use Of Individual Arbitration Agreements

by Husch Blackwell LLP
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The United States Supreme Court settled a controversy that had been brewing for half a decade as to whether the Federal Arbitration Act (“FAA”) made enforceable individual agreements to arbitrate employment-related claims in the face of the National Labor Relations Act (“NLRA”) which is seen to protect individuals’ rights to join together and participate in protected “concerted activity” under Section 7 of the NLRA. In a 5-4 decision, written by Justice Neil Gorsuch, the Court found such class or collective action waivers in arbitration agreements to be enforceable and overturned the decision of the Seventh Circuit in Epic Systems Corp. v. Lewis, (7th Cir. 2016), while resolving a split in the Circuits on this issue. With the resolution of this uncertainty, many other employers may consider individual arbitration agreements, waiving class or collective action, for their employees.

BACKGROUND

Over the past decade, there has been significantly increasing litigation regarding employee rights and claims of violations under the Fair Labor Standards Act, and state wage and hour laws. In those class or collective actions, a few representative employees can represent hundreds or thousands of other similarly situated former or current employees claiming employer failure to record hours of work correctly, failure to pay overtime compensation, or mischaracterizing exempt or nonexempt work by its employees, setting up very expensive, and protracted litigation. As a result, many employers, encouraged by earlier decisions of the Supreme Court, such as AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), crafted individual arbitration agreements protecting the employee’s rights to pursue violations of law but doing so only in the framework of arbitration and only as an individual, not as a class or collective action. While arguably there are advantages to both sides to arbitration, such as confidentiality, speed of resolution, and sometimes cost of the proceeding, employees argued in the Epic case, as well as the two other cases under review, Ernst & Young LLP v. Morris, (9th Cir. 2016), and National Labor Relations Board v. Murphy Oil USA Inc., (5th Cir. 2015), that being forced to resolve this type of issue individually would diminish the likelihood of proceeding, given the risks and reward of such litigation, and that Section 7 of the NLRA effectively nullified the FAA by its promise of protecting employees collective action to enforce engagement in concerted employment-related activities.

THE COURT’S DECISION

The Court looked at the plain language of the FAA requiring courts to enforce agreements to arbitrate and suggested the plain language would apparently resolve the argument in the case. While the employees attempted to claim a FAA savings clause, which allow courts to reject enforcement of arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any such contract,” the Court suggested that such savings clause merely recognized the general contract defenses “such as fraud, duress or unconscionability” that it had identified in the AT&T Mobility case. When looking specifically at whether the NLRA would challenge that analysis, the Court found that Congress must give clear direction that one law would displace another rather than allowing them to be read to give effect to both. The Court could find no such direction in Section 7 of the NLRA, which primarily focuses its rights on union organizing and collective bargaining, and does not hint or provide clear direction to displace the FAA. Indeed, the Court noted that when the NLRA was adopted in 1935, class and collective procedures were hardly known. Further, the Court recognized that when Congress chooses, it has demonstrated how to override the FAA and has not done so in this particular instance.

Justice Ginsburg filed the dissenting opinion, in which she was joined by Justices Breyer, Sotomayor and Kagan, which included a warning that such a reading of the law not only deprives employees of the protection of Section 7 of the NLRA to proceed in a class or collective action, but suggesting that, “The inevitable result of today’s decision will be the underenforcement of federal and state statutes designed to advance the well-being of vulnerable workers.”

WHAT THIS MEANS FOR EMPLOYERS

Many employers who have created individual arbitration agreements for their employees will find significant encouragement to use and enforce those agreements in the face of employee claims, especially if those claims might otherwise give rise to class or collective actions. To relieved of the extremely costly steps to defend, litigate and resolve those matters, employers may be encouraged to appropriately resolve issues on an individual basis and undertake broader actions if called for. Many other employers might see this as the opportunity to move past the uncertainty of the past have decade and more, and work to craft enforceable arbitration agreements for its employees, using the support of the FAA, which allows that arbitration agreements “shall be valid, irrevocable and enforceable”, as recognized and construed by many federal courts and now the U.S. Supreme Court.

Of course, employers seeking to review or create such arbitration agreements with class action waivers should proceed carefully and with counsel, to explore the costs and benefits of such agreements. If crafting such agreements, they must withstand the state law prohibitions against such agreements that might be overreaching as unconscionable, or secured through fraud or duress.

OTHER CONSIDERATIONS AS A RESULT OF THE #METOO MOVEMENT

In an interesting turn of events, Microsoft, Uber and Lyft have now withdrawn their commitment to arbitration agreements to resolve claims of sexual misconduct and other adverse actions, as part of their commitment to greater transparency and protection of both employees and those using their services. These organizations have reacted to criticism that arbitration may hide bad actors or inadequate responses, impede the right of individuals or others to proceed in a class action, thereby diminishing the likelihood of any action. These large consumer-oriented employers have made the decision to move away from arbitration agreements. However, it is important to note that mandatory arbitration, while no longer required for individual claims, continues to be required for class action claims. For instance, employers may choose only to have class and collective actions related to wage and hour issues subject to arbitration agreements, but allow discrimination or harassment claims to proceed either under arbitration in a class manor, or to move to the state or federal process, and not insist on proceeding confidentially on those claims.

Even though the recent ruling of Epic Systems Corp. v. Lewis confirms the enforceability of employee related arbitration agreements, companies that have historically relied on these agreements, or are considering them, may choose, like Microsoft, Uber and Lyft, to reduce reliance on the confidential arbitration process. Moving forward, rather than solely focusing on the “recent win” in the Court, employers should analyze this trend and their public image in light of the #MeToo movement to determine whether or not an enforceable arbitration agreement would be in the best interest of their business and brand.

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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