[co-author: Alex Katsnelson]

In one of its most important employment law decisions in decades, the U.S. Supreme Court has ruled that an employer's use of a class or collective action waiver (class waiver) in a mandatory employment arbitration agreement must be enforced as written and its inclusion in the agreement does not violate the National Labor Relations Act (NLRA).¹ While tens of millions of employees in the U.S. are already subject to arbitration agreements, many employers do not include class waivers in their agreements or use arbitration agreements at all. Because Epic Systems gives most employers the green light to include class waivers in their employment arbitration agreements, the decision is certain to result in the growing use of both arbitration agreements and class waivers, and therefore will have significant ramifications for employment litigation, including fewer employee class actions.

Background

Prior Supreme Court Precedent on Class Waivers

Prior Court cases have upheld the use of class waivers in the context of a mandatory consumer arbitration agreement.² In these cases, the Court has underscored the broad reach of the Federal Arbitration Act (FAA), which generally provides that arbitration agreements "shall be valid, irrevocable, and enforceable…"³ As a result, lower courts "must 'rigorously enforce' arbitration agreements according to their terms, including terms that 'specify with whom [the parties] choose to arbitrate their disputes,' and 'the rules under which that arbitration will be conducted.'"⁴

State court decisions have mostly followed the Court's lead and have similarly upheld class waivers absent valid contractual defenses generally available under applicable law, e.g., fraud, duress, or unconscionability.⁵ For example, in Iskanian, the California Supreme Court determined that the Court's precedent establishes that the FAA prevents states from mandating or promoting procedures incompatible with arbitration, and accordingly preempted a California court-adopted rule that made enforcing class waivers difficult.⁶ Similarly, a New York court determined that the Court's class waiver rulings undermine any argument that an employee enjoys an absolute right to pursue a class or collective action.⁷

NLRB D.R. Horton Decision

Notwithstanding this Court precedent, in D.R. Horton, Inc., the National Labor Relations Board (NLRB) held that "employers may not compel employees to waive their NLRA right to collectively pursue litigation of employment claims in all forums, arbitral and judicial."⁸ In reaching its conclusion it determined that class and collective litigation of claims pertaining to employment terms and conditions constitutes "protected concerted activity" under the NLRA.⁹ Further, the NLRB noted that it had previously found unlawful "employer-imposed, individual agreements purporting to restrict Section 7 rights," including those requiring employees to pursue claims against their employer only individually.¹⁰ Finally, the NLRB concluded that there existed no conflict between the NLRA and the FAA that prevented enforcement of the class waiver.¹¹

Courts Split on Whether to Follow D.R. Horton

Following the NLRB's D.R. Horton decision, federal and state courts alike have issued conflicting decisions on whether an employer violates the NLRA by requiring employees to sign an agreement precluding them from bringing a class claim (in any forum) regarding wages, hours, and terms and conditions of employment. For example, the Ninth (which includes California and Washington), Sixth, and Seventh Circuits followed D.R. Horton and held that such class action waivers violate the NLRA and cannot be enforced. In contrast, the Eighth, Eleventh, Fifth (which includes Texas), and Second (which includes New York) Circuits upheld class waivers in arbitration agreements and determined that the FAA mandates enforcement of class waivers, and that otherwise lawful class waivers did not violate the NLRA.

D.R. Horton's conclusion that a class waiver is unlawful under the NLRA also created confusion in the state courts. For example, California's Supreme Court refused to follow D.R. Horton and found that a class waiver did not violate the NLRA (provided it does not preclude a claim under PAGA, California's Private Attorneys General Act of 2004). In contrast, a New York appeals court went the other way and held that employee class waivers violated the NLRA and cannot be enforced.¹²

In Epic Systems, the Court resolved this conflict and addressed the FAA and NLRA concerns raised by class waivers in employee arbitration agreements.

The Supreme Court's Analysis

In Epic Systems, the Court framed the issue as follows: "Should employees and employers be allowed to agree that any disputes between them will be resolved through one-on-one arbitration? Or should employees always be permitted to bring their claims in class or collective actions, no matter what they agreed with their employers?"¹³ In a 5-4 decision, the Court said the answer to these questions was clear: "Congress has instructed federal courts to enforce arbitration agreements according to their terms—including terms providing for individualized proceedings."¹⁴

In reaching its conclusion, the Court looked not only to the FAA, but to its own prior decisions and determined, once again, that the FAA "requires courts 'rigorously' to 'enforce arbitration agreements according to their terms, including terms that specify with whom the parties choose to arbitrate their disputes and the rules under which that arbitration will be conducted.'"¹⁵ In the case before it, the Court observed, the parties' arbitration contract made clear that they had not only agreed to arbitrate their disputes, they "indicat[ed] their intention to use individualized rather than class or collective action procedures," something the Court concluded the FAA "seems to protect pretty absolutely."¹⁶

The Court similarly rejected any argument that the NLRA renders class waivers illegal, dismissing arguments that such waivers violated the NLRA by prohibiting "protected concerted activity," or that the FAA's "saving clause" created an exception applicable to the assertion that class waivers violated the NLRA. Instead, the Court opined that its prior rulings made clear that creating such an exception in the case before it would represent a "fundamental" change to the traditional arbitration process and "would sacrific[e] the principal advantage of arbitration—its informality—and mak[e] the process slower, more costly, and more likely to generate procedural morass than final judgment."¹⁷

Finally, the Court underscored its duty to interpret allegedly conflicting statutes "as a harmonious whole rather than at war with one another."¹⁸ Doing so in this case, the Court concluded, required the recognition that the NLRA's purpose is to primarily secure the rights of employees to organize unions and bargain collectively, but that the statute says nothing that would suggest that it includes a right to class or collective actions "or even hint[s] at a clear and manifest wish to displace the [FAA]" (a requirement for establishing that two statutes cannot be harmonized, and that one displaces the other).¹⁹ As the FAA, in turn, deals only with arbitration, the statutes must be read in a manner that avoids conflict and the Court concluded no conflict existed here.

In dissent, Justice Ginsburg decried the majority's holding as "egregiously wrong," asserting that it "subordinates employee-protective legislation to the [FAA]," and in doing so "the Court forgets the labor market imbalance that gave rise to [laws such as the NLRA], and ignores the destructive consequences of diminishing the right of employees 'to band together in confronting an employer.'"²⁰

What Should Employers Do After Epic Systems?

While many employers require an employee to sign a mandatory arbitration agreement as a condition of employment, many do not. Even if an employer uses such an arbitration agreement, it may not include a class waiver. For example, the D.R. Horton decision caused many employers (including in California) to delay adoption of a class waiver until the Court resolved this conflict.

Epic Systems now makes clear that class waivers, properly drafted, do not violate the NLRA and can be enforced. In short, the decision gives employers the green light to include express class waivers in their mandatory arbitration agreements if they elect to do so. As a result, employers should do the following:

• Consider adding a class waiver to the employer's existing mandatory arbitration agreement. Doing so may reduce significantly the risk of potential class action litigation of employment-related claims, including federal wage and hour claims.
• Where the employer does not already have an arbitration agreement requiring the arbitration of all employment-related suits, it should consider adopting one. Even those employers that previously decided against the use of employment arbitration agreements may wish to revisit that call now that it is clear that it can include a class waiver.
• Where an employer already uses an existing arbitration agreement, carefully review that agreement with counsel (as well as any related policy statements in handbooks, equity agreements, or elsewhere) to ensure that the agreement is enforceable under applicable law. Many older forms used by employers run afoul of current case law and periodic review of the employer's arbitration agreement makes sense in any event. While a class waiver is enforceable, it will likely not be enforced if it exists in an otherwise unlawful arbitration agreement.
• In California, care should be taken not to prohibit a representative action permitted by PAGA. Including language in an arbitration agreement that purports to do so jeopardizes the agreement's enforceability, including its class waiver. While PAGA may diminish some of the utility of a class waiver for California employers, a class waiver may nevertheless be of value.
• Confirm that they have a robust system in place to ensure that all existing employees have indeed signed their arbitration agreements, and that agreements are retained appropriately. An employer's decision to adopt an enforceable arbitration agreement (with or without a class waiver) is meaningless if the employer does not ensure that it can locate the agreement when needed.
• Consider whether to exclude from any arbitration the mandatory arbitration of sexual harassment matters. While most companies don't do so, recently Microsoft and Uber have stated that they are doing so (at least as to individual claims). Moreover, legislative initiatives such as the federal Ending Forced Arbitration of Sexual Harassment Act, and other recently enacted state laws may make consideration of this approach prudent.
• Together with counsel, be vigilant in enforcing an arbitration agreement where circumstances warrant doing so.