Many employers prefer to resolve disputes with employees through arbitration as opposed to more costly litigation in court. This dispute-resolution process requires the employer and employee to enter into an agreement to arbitrate disputes. With the increase in popularity of employment class action lawsuits, employers have started including arbitration provisions in employment agreements, under which the employees waive their ability to bring or participate in class action lawsuits. While employment arbitration agreements cut across all industries, they are especially common with international employers and companies in the restaurant and hospitality industry (two prominent types of employers in this region).
The legality of employment arbitration agreements with class action waivers had been called into question in recent years. The National Labor Relations Board (NLRB) and several appellate courts had taken the position that the National Labor Relations Act (NLRA) prohibits class action waivers in the arbitration provisions of employment agreements. Conversely, other appellate courts have concluded that the Federal Arbitration Act (FAA) permits these waivers and that the NLRA does not prohibit them. These conflicting views became defined at the federal appellate level when the U.S. Court of Appeals for the Second, Fifth and Eighth Circuits permitted employers to use class action waivers in their employment arbitration provisions, but the Sixth, Seventh and Ninth Circuits had ruled class action waivers violated substantive rights of employees under the NLRA.
On May 21, 2018, the U.S. Supreme Court resolved the conflict and held that, as a general matter, class action waivers in employment agreements are enforceable. The decision, Epic Systems v. Lewis, No. 16-285, 2018 WL 2292444 (U.S. May 21, 2018), examined the interplay between the FAA and the NLRA. The Supreme Court held that Congress did not address arbitration in the NLRA. Therefore, the NLRA provided no basis for invalidating class action waivers in arbitration agreements.
Background and Review of Supreme Court’s Decision
Section 7 of the NLRA gives employees the right to engage in “concerted activities,” and employers are prohibited from restricting or interfering with that right. The crux of the question, then, was whether the NLRA conflicted with and thus displaced the FAA, to the extent the latter would otherwise permit employment arbitration agreements to contain class action waivers. And if so, which statute controlled?
Specifically, the FAA provides that “a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction … shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract,” 9 U.S.C. Section 2. As such, “courts must place arbitration agreements on an equal footing with other contracts and enforce them according to their terms,” unless barred by a “generally applicable contract defense,” as in AT&T Mobility v. Concepcion, 131 S. Ct. 1740, 1745-46 (2011). Because a state law barring class action waivers in arbitration agreements is not such a defense, the FAA would preempt it. A federal law like the NLRA, on the other hand, required a different analysis, namely determining whether Congress intended the law to preclude certain forms of arbitration agreements.
Certain federal courts of appeals found that the NLRA does not override the FAA, which meant that class action waivers were permissible in employment arbitration agreements. Those courts relied on a lack of statutory text or legislative history that would permit an interpretation that the NLRA somehow displaced the FAA on this issue, as in D.R. Horton v. National Labor Relations Board, 737 F.3d 344, 361 (5th Cir. 2013).
On the other hand, the courts of appeals that found that class action waivers were unenforceable under the NLRA relied on the FAA’s savings clause, which allows arbitration agreements to be invalidated when grounds exist in law or equity for invalidating contracts generally. These courts believed that this clause opened the door to Section 7 of the NLRA, which prohibits restrictions on an employee’s right to participate in “concerted activities, see Lewis v. Epic Systems, 823 F.3d 1147, 1157 (7th Cir. 2016), cert. granted, (U.S. Jan. 13, 2017).
The Supreme Court held the “law is clear”—arbitration agreements are interpreted as written because Congress, through the FAA, wanted the agreements enforced in that manner. The Supreme Court went on to state that “while Congress is of course always free to amend this judgment, we see nothing suggesting it did so in the NLRA—much less that it manifested a clear intention to displace the FAA.” The court held that the FAA’s saving clause “recognizes only defenses that apply to ‘any’ contract.” Thus, the employees’ objections to the “individualized nature of the arbitration proceedings” contemplated by their employment agreements do not fall into categories such as fraud, duress, or unconscionability, i.e., the bases of “generally applicable” contract defenses.
In examining the purported tension between the FAA and the NLRA, the court found none existed. “When confronted by two acts of Congress allegedly touching on the same topic, this court is not at liberty to pick and choose among congressional enactments and must instead strive to give effect to both.” As to the possibility that one statute replaces the other, there is a “heavy burden of showing a clearly expressed congressional intention that such a result should follow.” These notions are based on principles inherent in the separation of powers and without them, “judges could pick and choose between statutes,” which “risks transforming courts from expounders of what the law is into policymakers choosing what the law should be.”
As such, the court explained that the employees, in their reading of Section 7 of the NLRA, “ask us to infer a clear and manifest congressional command to displace the [FAA] and outlaw agreements like theirs.” Because the NLRA focuses on the right to “organize unions and bargain collectively” but “does not express approval or disapproval of arbitration,” “that much inference is more than [the] court may make.” The court reasoned that the NLRA “does not even hint at a wish to displace the [FAA]—let alone accomplish that much clearly and manifestly, as our precedents demand.”
The policy discussions surrounding class actions and individual arbitration “are questions constitutionally entrusted not to the courts to decide but to the policymakers in the political branches.” The majority concluded by emphasizing the role of Congress in making economic policies. As an example, the court pointed to the Consumer Financial Protection Bureau’s promulgation of a rule prohibiting the use of class action waiver provisions in arbitration agreements between consumers and financial services providers, “only to see Congress respond by immediately repealing that rule.” Just as the executive branch may not try to sneak policy choices past Congress, “this court is not free to substitute its preferred economic policies for those chosen by the people’s representatives.”
In a 40-page dissent, Justice Ruth Bader Ginsburg labeled the majority opinion as “egregiously wrong.” Justice Ginsburg reasoned that class actions fit within the definition of “other concerted activities” and would have held that any prohibition on those rights is unenforceable in arbitration agreements.
What Does This Mean for Employers, Including Those in South Florida?
Given the cost of class actions in employment disputes, there is great value to limiting employee-employer disputes to individualized claims. Claims that could otherwise be subject to class action lawsuits are varied and could range from wage and hour actions to discrimination claims. As a result of the Supreme Court’s decision, it is now clear that employers can present employment arbitration agreements to employees that contain a class action waiver (presuming the other legal requirements for employment arbitration agreements are satisfied). Employers that have not sought to compel arbitration of employment disputes may want to consider whether it makes sense for their business to compel individual arbitration of such disputes. Businesses that already have arbitration agreements in their employment agreements may want to consider whether any revisions to those agreements may make sense in the wake of the court’s decision.
April Boyer is a partner in K&L Gates’ Miami office, where she counsels and represents employers in connection with the firm’s Labor, Employment and Workplace Safety practice.
Andrew Glass is a partner and Roger Smerage is a senior associate in the firm’s Boston office where they defend complex litigation matters including class actions and financial institutions and services litigation.