In a significant victory for employers, the U.S. Supreme Court ruled that arbitration clauses in employment contracts are enforceable even if they prevent workers from bringing class action lawsuits. The court considered three cases: all involving employees seeking to litigate Fair Labor Standards Act (overtime or minimum wage) and related state law claims through class or collective actions in federal court. Each employee had an employment agreement requiring individual arbitration proceedings.
Arbitration is often preferred by employers because it offers greater confidentiality, often quicker decision making, and some control over selecting the lawyer who serves as the arbitrator. Arbitration clauses requiring one-on-one proceedings prevent employees from banding together and pooling resources against an employer while represented by (usually) one law firm. Oftentimes, this translates into major litigation cost savings for employers.
The policy behind the court’s decision is two-fold. First, federal law has long favored arbitration as a quicker, simpler, and less costly way of deciding disputes compared to cases filed in the court system. Second, the court’s prior decisions that favor arbitration clauses continue to make sense. The court follows a rule of construction that existing statutes must be interpreted in a way that gives effect to both laws rather than causing conflicts unless there is clear congressional intent that one statute is meant to prevail. For this reason, the court rejected the employees’ argument that the National Labor Relations Act’s protection of workers’ rights to engage in concerted activity for their protection trumps the Federal Arbitration Act.
Justice Ruth Bader Ginsburg, who wrote the dissent, expressed concerns about the potential negative impact of this decision on enforcement of employment laws designed to protect workers. If it is easier for employers to escape class action litigation, then arguably fewer employees will bring claims.
The New York Times estimates that this decision could impact some 25 million employment contracts. Justice Ginsburg noted that research data indicates an increase from 2.1 percent to 53.9 percent since 1992 in nonunionized employers using mandatory arbitration agreements. The percentage of nonunion employers requiring class action waivers is estimated at up to 23.1 percent.
The takeaway? Employers can effectively circumscribe their employees’ ability to participate in class-action litigation against them by including appropriate arbitration clauses in their employees’ employment agreements. This is a strong decision for our corporate clients who are using, or would like to use, arbitration clauses in their employment contracts that restrict class action claims. However, it is critical that the arbitration clause used by the companies comply with the law. Because arbitration clauses are only enforceable if properly drafted, you should consult with experienced employment counsel if you intend to avoid class or collective action employment litigation.
Paul Lopez is director and COO of Tripp Scott and Megan Janes is an associate with the firm.