The U.S. Supreme Court issued a highly anticipated decision on May 21, 2018, ruling that class and collective action waivers in employment arbitration agreements are enforceable under the Federal Arbitration Act (FAA) and do not violate Section 7 of the National Labor Relations Act (NLRA). The 5-4 decision, written by Justice Neil Gorsuch in Epic Systems Corp. v. Lewis and two other cases consolidated with Epic Systems, allows employers to require workers to arbitrate legal claims on an individual basis, in effect prohibiting class or collective cases.

The FAA and NLRA and the split in the federal appeals courts

The FAA, enacted in 1925, encourages private dispute resolution through arbitration.  Section 7 of the NLRA, enacted in 1935, protects employees who engage in “concerted activities for the purpose of collective bargaining or other mutual aid or protection.” 

In 2012, the National Labor Relations Board (NLRB or Board) concluded for the first time that an employer violated the NLRA’s Section 7 by requiring employees to sign arbitration agreements that contained a waiver of the right to pursue class and collective claims in court. The Board reasoned that “the collective pursuit of workplace grievances through litigation or arbitration is conduct protected by Section 7.”

The Fifth U.S. Circuit Court of Appeals overturned that decision in 2013.  But since then, the Sixth, Seventh, and Ninth Circuit Courts of Appeals adopted the NLRB’s position that class and collective action waivers violate Section 7, while the Second and Eighth Circuit Courts of Appeals, agreeing with the Fifth Circuit, ruled that the NLRA permits mandatory class waivers. 

This resulted in a classic split between federal appeals courts in different parts of the country. In October 2017, the Supreme Court heard appeals in Epic Systems and two other cases embodying the split—all three cases asserted collective wage and hour claims under the Fair Labor Standards Act (FLSA).

The Supreme Court’s decision

The Supreme Court majority concluded that an employment arbitration agreement containing a class and collective action waiver does not conflict with the NLRA. According to the Court, Section 7’s policy of protecting “concerted activities” for “mutual aid or protection” at work does not conflict with Congress’s endorsement of arbitration in the FAA.

The Court noted that in the FAA, “Congress has instructed federal courts to enforce arbitration agreements according to their terms – including terms providing for individualized proceedings.” It further stated that the FAA’s “saving clause,” which allows arbitration agreements to be defeated “upon such grounds as exist at law or in equity for the revocation of any contract” – such as fraud, duress, or unconscionability – is not applicable to this case.

The Court also said that while the NLRA “secures to employees rights to organize unions and bargain collectively,” it is silent on “how judges and arbitrators must try legal disputes that leave the workplace and enter the courtroom or arbitral forum.” According to the ruling, the “concerted activities” protected by Section 7 do not include the right to assert class and collective actions.

In a 30-page dissent, the minority led by Justice Ruth Bader Ginsburg called the decision “egregiously wrong.” She expressed concern that employees will now “be disinclined to pursue small-value claims,” like wage and hour claims under the FLSA, “when confined to proceeding one-by-one.”

The bottom line for employers

While employers may now use arbitration agreements to in effect eliminate most employment class litigation, keep in mind that there are pros and cons of requiring arbitration of employment disputes. Also, arbitration agreements have to meet basic due process standards to be enforced; agreements that are one-sided will still be subject to challenge based on traditional contract defenses.