On Monday, a sharply-divided U.S. Supreme Court upheld the enforceability of employment agreements that bar class actions by mandating individualized arbitration. This ruling has significant ramifications that every employer should consider.
In a 5-4 decision, written by Justice Neil Gorsuch, the Court found in favor of the employers in three cases combined for review: Epic Systems Corp. v. Lewis, National Labor Relations Board v. Murphy Oil USA, and Ernst & Young LLP v. Morris. In each of these cases, the employees signed or otherwise accepted agreements stating they would arbitrate disputes individually and waive the right to participate in a class action or collective proceeding. The employees later filed class or collective actions against their employers in federal court for employment claims such as failure to pay overtime pay in violation of the Fair Labor Standards Act. The employers moved to compel the employees to pursue their claims in individual arbitration cases rather than as part of a class or collective proceeding in court.
In 2012, the National Labor Relations Board began taking the position that any prohibition on class and collective actions effectively violates employees' statutory right to engage in concerted activity concerning terms and conditions of employment pursuant to the National Labor Relations Act (NLRA). Because of divergent rulings among lower courts, the Supreme Court weighed in to resolve the issue.
The Supreme Court's majority decision holds that the Federal Arbitration Act (FAA) requires enforcement of arbitration provisions in employment contracts mandating one-on-one arbitration, and that the NLRA neither conflicts with nor overrules the FAA. In effect, employers can now utilize arbitration agreements to foreclose the ability of employees to pursue class and collective actions.
Although the Supreme Court has issued a series of rulings over the past 25 years favoring the enforcement of arbitration agreements in the employment setting, the ruling in Epic Systems will extend employers' ability to require that all employment disputes—including wage-and-hour litigation and discrimination claims—be handled through individual, private arbitration proceedings.
Employers should consider the following pros and cons when deciding whether to adopt a mandatory arbitration program for its workforce:
- Regardless of the strength or weakness of the underlying claims, class and collective actions are extremely expensive for an employer to litigate—resulting in a strong incentive to pay a substantial settlement even in weak cases. Individualized arbitration processes may weed out some frivolous claims.
- Arbitration proceedings are private, and can also be confidential if specified in the agreement.
- Arbitration can involve somewhat less discovery and can move through the system more swiftly than court actions.
- Arbitration hearings can be scheduled more efficiently and are not dependent on the mandates of a judge's schedule.
- An experienced arbitrator may be less of a "wild card" than a jury.
- Arbitration decisions are generally final and not subject to appeal, except in extraordinary circumstances or unless broader appeal rights are provided in the arbitration program.
- Courts have required that employment arbitration programs must satisfy certain due process protections, such as not requiring the employee to pay more in arbitration costs than the employee would have had to pay in filing fees were the employee to file the same action in a court. Thus, the employer ends up bearing a significant majority of the arbitrator's fees and administrative costs.
- Some employers with mandatory arbitration programs have experienced more claims than employers without such programs, perhaps due to the confidential nature of arbitration and the ease of filing claims without an attorney.
- While arbitration is generally considered a more cost-effective forum than court, that is not always the case, especially given that arbitrators can require the same amount of discovery, or even more, than is typically available in court.
- Arbitrators are less likely to resolve a case early through a motion to dismiss or a motion for summary judgment, and thus a higher proportion of arbitration claims may be fully litigated through a hearing (the equivalent of a trial).
- There is a popular belief that arbitrators are more likely to "split the baby" in an award rather than fully dismiss a weak claim.
- Arbitration decisions cannot be easily appealed, so an adverse decision is unlikely to be overturned.
- Requiring employees to sign mandatory arbitration agreements can be viewed as heavy-handed, negatively impacting employee morale and subjecting the employer to negative publicity.
Employers should note that arbitration programs will not prevent enforcement actions by federal and state agencies, such as wage-hour audits by the Department of Labor or pattern-and-practice litigation by the U.S. Equal Employment Opportunity Commission. There may also be state law mechanisms allowing plaintiffs to circumvent mandatory arbitration programs, such as California's Private Attorneys General Act (PAGA).
If an employer wishes to adopt a mandatory arbitration program (or review an existing program), the employer should:
- Ensure that the program meets the due process protections required by federal and state courts. These can include: (i) limiting the fees that the employee must pay; (ii) confirming that the employee can recover the same types of damages that would be available in court; (iii) making sure that the terms of the program are understandable to the average employee; and (iv) providing for adequate consideration for the agreement.
- Think through the internal and external public relations implications of implementing a mandatory arbitration program.
- Plan a protocol for confirming the employee's agreement. An employer utilizing a digital or electronic signature must be able to present credible evidence that the signature was the act of the employee. Employers should therefore review their computer and intranet security measures with their IT department to ensure they comply with current technological and legal standards to establish that digital or electronic signatures are authentic and genuine. Employers who do not implement proper safeguards to authenticate their employees' signatures risk having their arbitration agreements invalidated.
- Prepare for the possibility of an increase in number of claims, although they will individually be smaller because they cannot be pursued on a class or collective basis.
The Employment and Labor team at Dentons can assist you in working through the pros and cons of a mandatory arbitration program and in implementing such a program in your workplace.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.