The Supreme Court Says Class Action Waivers Are Enforceable, But Are Arbitration Agreements Right For Your Organization?

By David Moore, Heather Becker, and Priya Reddy of Laner Muchin, Ltd.

On May 21, 2018, the United States Supreme Court held that class and collective action waivers in employment arbitration agreements are enforceable. The 5-4 decisionis widely viewed as a significant victory for employers.  It affirms employers’ ability to require employees to individually arbitrate any employment disputes, and, thus, avoid defending lawsuits in court, including class and collective actions.

In 2012, the National Labor Relations Board (NLRB) took the position that employers violate the National Labor Relations Act (NLRA) if they require employees to waive their rights to participate in class and collective actions in arbitration agreements. Subsequently, the United States Circuit Courts of Appeal split on the issue and the stage was set for the Supreme Court’s review. The Supreme Court granted review of Epic Systems Corp. v. Lewis(Seventh Circuit), NLRB v. Murphy Oil USA Inc.(Fifth Circuit), and Ernst & Young LLP v. Morris(Ninth Circuit) in a consolidated action. In all three cases, the employees signed employment arbitration agreements that included class action waivers, but then filed or participated in class or collective action lawsuits against their employers alleging Fair Labor Standards Act and related state law violations.

The Supreme Court found that pursuant to the Federal Arbitration Act (FAA), courts must enforce employment arbitration agreements that require individual arbitration. The Court also held that the NLRA’s protection of employees’ rights to unionize and bargain collectively does not prohibit class action waivers. Therefore, the Court made clear that the NLRA does not prevent the enforcement of class and collective action waivers in employment arbitration agreements and those agreements must be enforced pursuant to the FAA.

While the law is now clear that class and collective action waivers in employment arbitration agreements are enforceable, that does not mean that all employers should rush to have their employees sign agreements requiring individual arbitration of all employment disputes. Employers should first evaluate the potential advantages and disadvantages of arbitration.

Several advantages of using arbitration agreements include:

  • Ability to Choose the Arbitrator: The employer and the employee are able to choose the arbitrator (e., the decision maker). In litigation, parties to litigation are not able to choose their judge.
  • Arbitrator Decides in Lieu of a Jury: In federal or state court, a trial before a jury is possible. Jurors who know nothing about your business are asked to resolve disputes of material fact and to apply the law to the facts, which can be a risky proposition.
  • Private Forum to Resolve Disputes: Arbitrations provide a more private forum than lawsuits in federal or state court. Although it is difficult to ensure strict confidentiality during the arbitration process; unlike lawsuits in federal or state court, the pleadings, testimony, and decisions of the arbitrator are not part of a public record, nor are they easily accessible to the public through a court clerk.
  • Proceedings Concluded More Quickly: Arbitration proceedings are generally concluded faster than litigating in court.  A single-plaintiff discrimination case (not involving complex issues) can be pending for up to three years before the case is concluded in court (whether by motion or a trial).  A similar case in arbitration would likely be concluded in half that time.
  • May Avoid Class Claims: Through the inclusion of class and collective waivers in employment arbitration agreements, employers can potentially limit their exposure to class/collective claims, as discussed in Epic.

In contrast, employers must also consider the potential disadvantages of arbitration agreements and class and collective action waivers. Potential disadvantages include:

  • Binding Decisions: Arbitrators’ decisions are generally binding on the parties, and appealing is difficult because courts defer to arbitrators – especially when the arbitrator heard the evidence at the hearing firsthand. Therefore, if an employer receives a bad decision from an arbitrator, its ability to appeal the decision will likely be severely limited.
  • Limited Discovery: Discovery (e., exchanging documents, taking depositions, and obtaining subpoenas) in arbitration is sometimes not as extensive as discovery in federal or state court. As a result, employers may not be able to obtain the same amount of information relating to employees’ claims and/or damages prior to arbitration, which could hamper their ability to defend against the employees’ claims.
  • Arbitrations Can Be Expensive: Arbitration can be more expensive than litigating in a state or federal court. While the costs of arbitration, in some cases, may be less, especially since arbitrations tend to be more streamlined, arbitrations are still very costly. There are a number of costs in arbitrations that are not present in court, including administrative fees charged by the arbitral agency and all work performed by arbitrators is paid by the hour (often at rates higher than the employer’s attorney).
  • Costs for Court Motions to Enforce and Compel Arbitration: Plaintiff’s attorneys often either file lawsuits in a state or federal court anyway, or seek to invalidate an otherwise enforceable arbitration agreement in a federal or state court.  In either case, employers will incur attorneys’ fees to convince a court that the arbitration agreement is enforceable, and to obtain an order requiring the dispute be arbitrated.
  • Risk of Numerous Single-Plaintiff Claims and Multiplying Costs: As outlined in the two previous points, the costs per individual arbitration can be significant and by prohibiting employees from bringing class or collective actions, employers may subject themselves to multiplying costs.  While an employer may avoid a wage and hour class action, it could face numerous individual arbitrations.
  • Avoiding Arbitration through Summary Judgment is Less Common: In federal or state courts, employers in employment discrimination cases typically file a motion for summary judgment asking the court to dismiss the case because, assuming all the material facts that favor the plaintiff are true, the plaintiff could not prevail based on the applicable law. If appropriate, summary judgment is a very effective tool to avoid a trial, and federal judges in Illinois are more inclined to grant an employer summary judgment than an arbitrator. Arbitrators are sometimes less inclined to grant these motions.
  • Administrative Agency Charges Still Allowed:Arbitration agreements cannot preclude an employee from filing an administrative charge with an applicable state or federal agency (e., the NLRB, U.S. Equal Employment Opportunity Commission, U.S. Department of Labor, etc.), and cannot preclude a government agency, such as the EEOC, from filing a lawsuit against an employer based on an employee’s charge.

In summary, while the Supreme Court has made clear that arbitration agreements with class and collective action waivers are enforceable, the decision of whether employers should enter into arbitration agreements with employees depends on what employers are seeking to achieve with the agreements, and a risk assessment after weighing the advantages and disadvantages of arbitration discussed above. That analysis should be a rigorous one. We encourage you to consult with your employment attorney when navigating through these issues and to ensure your arbitration agreements meet the many federal and states requirements to be enforceable.

If you need more information about whether arbitration agreements make sense for your organization, you can contact us here.

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