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Restoring Balance: Supreme Court Upholds Class Action Waivers in Employment Arbitration Agreements, Providing Employers with Some Relief from Rampant Wage and Hour Class Litigation

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On May 21, 2018, the Supreme Court upheld the use of class action waivers in employment arbitration agreements, which is one of the few options employers have to limit costly “bet the business” class actions.  Prior to this decision, the National Labor Relations Board (NLRB) and a few appellate courts had held that these waivers were invalid because they conflicted with the National Labor Relations Act (NLRA), the federal law governing collective bargaining and other labor union issues. In its recent decision, Epic Systems Corp. v. Lewis, the high court rejected that conclusion and reinstated the practice of using class action waivers nationwide.  In light of this ruling, employers should consider revising their policies or adopting new arbitration agreements.

In Epic and its companion cases, individual employees executed arbitration agreements containing class action waivers. Under the Federal Arbitration Act (FAA), such agreements generally are enforceable and courts have recognized that wage and hour claims, including claims under the Fair Labor Standards Act (FLSA) can be subject to mandatory arbitration. The employees nonetheless joined class and collective actions against their employers. In response, the employers sought to dismiss the class actions and compel individual arbitration. The NLRB, the Seventh Circuit Court of Appeals, and the Ninth Circuit Court of Appeals each held that the NLRA prohibited the use of the class action waivers because the statute protects “concerted activity” for “mutual aid or protection” – including class action lawsuits. The question before the Supreme Court was whether the FAA or the NLRA controlled the case: Either arbitration agreements could preclude class and collective actions or labor law preempted such limitations.

The Court ruled, in a 5-4 split decision, that the FAA authorized class waivers. In particular, the Court rejected the argument that the “concerted activities” described by the NLRA included class actions or collective actions under the FLSA. Justice Neil Gorsuch, writing for the majority, concluded that concerted activities include primarily collective bargaining and union-related activities. That conclusion could have far-reaching consequences for labor law decisions going forward, because it narrows the definition of concerted activities compared to the position taken by the NLRB. Because the NLRA did not present an obstacle to the waivers, the FAA made the agreements enforceable and the employees could not avoid their agreements to waive participation in class or collective actions.

This is an extremely important decision for the business community. Employers should examine their arbitration agreements, employment contracts and personnel policies in light of this decision. An effective class action waiver could help limit exposure to large and very costly class actions.