Last week, the U.S. Supreme Court handed down a decision affirming the enforceability of those arbitration agreements in employment that prohibit collective actions; a decision that could significantly alter the landscape of employment litigation going forward. Epic Systems Corp. v. Lewis, (No.16-285).
The significance of the decision is not its change in precedent but in the fact that the collective action lawsuit filed under the Fair Labor Standards Act has, for some years, been the fastest growing type of litigation in employment law. Over a recent 15 year period, the number of such lawsuits has increased more than 350 percent. It is no wonder, therefore, that employers would attempt to stem the tide of these all-too-frequent (and all-too-costly) trips to federal court and increase the use of arbitration agreements in employment, requiring all claims to be made on an individual basis. Over the last 25 years, the Supreme Court has consistently upheld the enforceability of arbitration agreements, both for employment and commercial matters. In at least two of those decisions, the Court has remained unpersuaded by the argument of the moving parties that such agreements were unconscionable because they prohibited class actions.
The use of one-on-one arbitration agreements was on the rise when the National Labor Relations Board entered the fray. In its 2012 decision in D.R. Horton, 357 NLRB 277, the NLRB found that the right to enter into a class of employees who seek to enforce terms of employment against an employer was protected under Section 7 of the National Labor Relations Act, which created a right “to engage in concerted activities.” Therefore, according to the NLRB, employment agreements that prohibit class or collective actions are unenforceable. Section 7 of the NLRA would control over the Federal Arbitration Act. Following the D.R. Horton, decision, the NLRB issued a significant number of decisions striking down arbitration agreements that prohibited class action. Additionally, federal district courts were confronted with an increased number of collective actions notwithstanding the existence of such arbitration agreements. The circuit courts were not of the same mind, thus paving the way for the consolidation of cases before the Supreme Court.
The consolidated cases included Epic Systems, Corp. v. Jacob Lewis (No. 16-285), an FLSA misclassification case arising in the Seventh Circuit, Ernst & Young LLP et al. v. Stephen Morris, et al. (No. 16-300), also a misclassification case from the Ninth Circuit, and National Labor Relations Board v. Murphy Oil USA, Inc., et al. (No. 16-307), involving an FLSA claim alleging off-the-clock work from the Fifth Circuit. All three cases involved the NLRB’s determination that there existed a right under Section 7 for employees to engage in class actions or, as Justice Gorsuch framed the issue in his majority opinion: “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?”
The answer to his question was no surprise. Consistent with its long line of decisions regarding the enforceability of arbitration agreements, the Supreme Court, by a 5 to 4 majority, held that such employment agreements are enforceable under the Federal Arbitration Act, notwithstanding the language in Section 7 of the NLRA. As Justice Gorsuch pointed out, the Arbitration Act and the NLRA have coexisted for decades. The argument that they somehow conflict only arose as a result of the 2012 D. R. Horton decision, and its expansive view of Section 7 rights.
The majority addressed each of the three arguments related to the conflict of rights, first considering whether the Federal Arbitration Act’s savings clause, which allows courts to refuse to enforce arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract,” should be triggered by the employees’ invocation of NLRA Section 7 rights. The Court’s answer to this was no. Applying its earlier analysis from AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), the Court held that the FAA’s savings clause does not make the employment agreement unenforceable. The agreement in these cases was to arbitrate cases individually. This is neither unconscionable, as found in Concepcion, nor illegal, as the employees would suggest in this case.
Second, the Court considered whether the language in Section 7 of the NLRA, the language creating a right to engage in concerted activity, should displace the congressional intent of the Federal Arbitration Act. The Court found in the negative, holding that the NLRA does not approve or disapprove of arbitration and does not mention class or collective actions. Such language, therefore, cannot render the clear language of the FAA a nullity.
Finally, Justice Gorsuch dismissed any argument that the NLRB, in this case, was entitled to deference pursuant to Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc. 467 U.S. 837 (1984). As he explained, even if the Court were inclined to follow Chevron, this is not a case of an administrative agency interpreting their own statute. Rather, this is a case of an administrative agency (the NLRB) interpreting their statute to limit the effect of a second statute: the Federal Arbitration Act. That would be well beyond Chevron deference. Moreover, while Chevron deference would suggest that the Executive Branch is more responsive to the people and entitled to deference because it is better equipped to determine “policy choices,” in this case the Executive Branch is not consistently of one mind. The Supreme Court received competing briefs from the NLRB and the Solicitor General, disputing the meaning of Section 7 of the NLRA. Thus, the deference argument could not prevail.
Four of the Justices joined in a dissent authored by Justice Ginsberg. In that dissent, Justice Ginsberg attempted to prop up the NLRB’s interpretation of its own statute, and emphasized the disparity of power that employees have versus their employer at the time such employees are being hired, arguing that agreements to arbitrate or the waiver of class/collective action rights is not a completely voluntary action. The majority, however, was dismissive of such arguments. “The policy,” said Justice Gorsuch, “may be debatable but the law is clear …. While Congress is of course always free to amend this judgment, we see nothing suggesting it did so in the NLRA.”
Employers are left, therefore, with the security of knowing that employment agreements that require arbitration of disputes through one-on-one arbitration will be enforceable against claims to the contrary under the National Labor Relations Act and the Federal Arbitration Act. The takeaways from the decision are threefold.
First, depending on the demographics of their workforce, employers need to consider with counsel the use of these arbitration agreements, if they are not already doing so. These agreements are extremely advantageous where there may be a commonality of claims, such as FLSA actions. Moreover, they are quickly becoming the norm. The use of mandatory arbitration agreements among large, nonunion employers is significant. As a competitive matter, employers may need to explore the use of this alternative method of dispute resolution.
Second, this case could redirect the efforts to neutralize arbitration agreements by proving the more traditional, contractual defenses of fraud, duress, or unconscionability. Employers are well advised to review their agreements and the circumstances under which they are presented to employees to ensure they comply with state law requirements.
Finally, it bears pointing out that the Court’s analysis in Epic Systems is a re-affirmation of the Federal Arbitration Act. It would not necessarily apply to representative suits (as opposed to class actions) filed under laws such as the California Private Attorneys General Act. Those laws would require separate analysis.