Many employers will be surprised to learn that, under some circumstances, the National Labor Relations Act (NLRA) may regulate their ability to enter into certain contractual agreements with employees. The decision of the Seventh Circuit Court of Appeals in Lewis v. Epic Systems Corporation sets the stage for potential review by the Supreme Court of the United States on the issue of the legality of employee waivers of the right to pursue class or collective actions for alleged wage and hour violations.

What the Court Held

Epic Systems Corporation, a nonunion producer of software for medical providers, required a group of employees to agree to arbitrate claims of statutory wage and hour violations. The agreement also prohibited collective arbitrations and collective actions.

An employee later filed a misclassification suit alleging that Epic Systems misclassified him and the company’s other technical writers and improperly denied them overtime compensation. Epic asked the district court to dismiss the complaint and to compel the employee to submit his claim, as an individual, to arbitration.

The district court refused and the Seventh Circuit Court of Appeals affirmed. The court held that Epic System’s contract provision requiring all wage and hour claims to be brought through individual actions violated the employee’s right, under the NLRA, to join with other employees for “mutual aid or protection.”

According to the court, since the arbitration clause was illegal under the NLRA, the terms were not enforceable under the Federal Arbitration Act (FAA)—the statute upon which Epic Systems relied to compel individual arbitration of wage and hour claims. All the Supreme Court cases cited by the appeals court in support of its conclusions entailed workplace actions by employees to obtain, enforce, or reinforce collective rights within the workplace. This was so even when employees spontaneously took action on the workplace floor without the presence of a labor organization representing employees. There was no Supreme Court precedent cited by the court to support the conclusion that Congress intended to prohibit employers and employees from entering into arbitration agreements providing for the resolution of individual workplace disputes.

Will This Decision Pass Muster in the Supreme Court?

Although there is no indication at this time whether Epic Systems will ask the Supreme Court of the United States to review the decision, the Fifth Circuit Court of Appeals has held similar arbitration provisions enforceable, notwithstanding Section 7 of the NLRA. The conflict between the Fifth Circuit and the Seventh Circuit on the same issue opens up the possibility that the Supreme Court will agree to resolve the dispute. When circuit courts disagree on the same issue, the Supreme Court may accept review and issue a final decision binding on all federal courts.

It’s All About Section 7 of the NLRA

The NLRA provision on which the Epic Systems case turned is Section 7, which states:

Employees shall have the right to self-organization, to form, to join, or assist labor organizations, to bargain collectively through representations of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection [emphasis added].

It was this last clause—“or other mutual aid or protection”—in  Section 7, upon which the Seventh Circuit seized to conclude that the NLRA prohibited employers from enforcing individual employment contract provisions requiring arbitration of individual wage and hour claims.

The National Labor Relations Board (NLRB) reached the same conclusion in an unfair labor practice case brought under the NLRA, D.R. Horton, Inc., 357 NLRB No. 184 (2012). This decision was overturned by the Fifth Circuit Court of Appeals, creating the conflict that provides the avenue for Supreme Court review.

Key Employer Takeaways

The Seventh Circuit’s application of the NLRA to nonunion workplaces is not justified by the NLRA’s text and overall design. Moreover, the decision is at odds with a solid body of Supreme Court decisions. Nevertheless, employers should keep the following in mind:

1. This decision does not require employees to abandon provisions in individual employment contracts requiring employees, as a condition of continuing employment, to arbitrate claims of alleged wage and hour violations.
2. The Epic Systems decision acknowledges that a contract provision requiring arbitration of a statutory claim of wage and hour violations is enforceable, notwithstanding the availability of a judicial forum. Precedent by the Supreme Court of the United States strongly supports this proposition.
3. The decision of the Seventh Circuit in Epic Systems and the NLRB’s decision in D.R. Horton, Inc. calls into question employers’ ability to enforce  a contract clause  restraining employees from prosecuting wage and hour claims as members of collective or class actions, including through arbitration.
4. Employers outside the Seventh Circuit are not directly affected by the decision in Epic Systems.
5. If Epic Systems seeks Supreme Court review, the Court may resolve the issue within the context of the both the NLRA and the FAA.