Can Employers Enforce Class-Action Waivers in Arbitration Agreements?

The U.S. Supreme Court announced on Jan. 13, 2017, that it will review three cases to determine whether class-action waivers in arbitration agreements are lawful.

Courts have generally enforced arbitration agreements if they allow employees to exercise their rights and aren’t too one-sided in favor of the employer.

However, conflicting decisions by federal appeals courts have left employers uncertain as to whether they can require employees to sign class-action waivers as part of arbitration agreements.

Courts Issue Conflicting Decisions

The National Labor Relations Board (NLRB) has consistently opposed class-action waivers, asserting that they infringe on employees’ right to engage in concerted activity.

Although several federal appeals courts have declined to take the NLRB’s position, the board recently found an ally.

On May 26, a three-judge panel of the 7th U.S. Circuit Court of Appeals held that an arbitration agreement prohibiting employees from bringing class or collective actions violated the National Labor Relations Act (NLRA) (Lewis v. Epic Systems Corp., No. 15-2997 (7th Cir. 2016)).

In that case, a technical writer for software company Epic Systems sued for overtime wages. He sought to represent a class of workers he claimed were misclassified as exempt under the Fair Labor Standards Act and Wisconsin wage and hour laws.

In response, the company tried to enforce a class-action waiver and an agreement to individually arbitrate his claims.

However, the court said the company interfered with its employees’ right to engage in concerted activity by preventing them from bringing class actions in any forum.

The decision is at odds with rulings by other federal appeals courts.

In D.R. Horton Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013), the 5th Circuit said class-action waivers are permissible in the employment context. Numerous courts have held “that there is no right to use class procedures under various employment-related statutory frameworks,” the 5th Circuit reasoned.

On June 2, the 8th Circuit also rejected the NLRB’s argument that mandatory class-action waivers violate the NLRA (Cellular Sales of Mo., LLC v. NLRB, No. 15-1860 (8th Cir. 2016)).

Supreme Court Likely to Weigh In

“These latest decisions reinforce a split in the federal courts of appeals … making it more likely that the Supreme Court will have to decide this issue," said Andrew Volin, an attorney with Sherman & Howard in Denver. 

Employment attorneys told SHRM Online that the vacancy left by Justice Antonin Scalia on the Supreme Court makes it hard to predict how the court will rule.

“The Supreme Court has issued a number of opinions in favor of arbitration,” said Sean Kirby, an attorney with Sheppard Mullin in New York City. “But how the court will rule on this issue is up in the air, especially since the court is missing a justice.”

“If the court does decide on the issue, it may come down to whoever the ninth justice is,” said Lauren Daming, an attorney with Greensfelder, Hemker & Gale in St. Louis. “Whoever gets Scalia’s seat may not be as in favor of arbitration and class-action waivers as he was.”

Decision Impacts Illinois, Indiana and Wisconsin

"The Epic Systems ruling only impacts workers in states within the Seventh Circuit—Illinois, Indiana and Wisconsin,” Volin explained.

“Employers that have already implemented arbitration agreements need to review those agreements to see if they include a class- or collective-action waiver,” Kirby said. “If they don’t include a waiver, it’s not really an issue.”

Employers in Illinois, Indiana and Wisconsin should keep in mind that, even if they do have a class-action waiver, they don’t have to enforce it, Daming said. They may want to weigh the costs and benefits of trying to enforce the waiver while this issue plays out.

Limits on the Ruling’s Reach

The employee in the Epic Systems case was required to sign the arbitration agreement and class-action waiver as a condition of continued employment. Therefore, the analysis in the case was limited to this type of mandatory agreement.

Kirby and Daming said employers may want to include a provision that allows employees to opt out of the agreement. “Then it’s not really mandatory,” Kirby said.

Volin said the 7th Circuit’s decision “is significant in several respects, but it should not be read as ending the ability of employers to require arbitration of employment claims.”

“Employers can still require employees to arbitrate most types of common employment claims, including wage and hour claims,” he said. “In fact, if Epic Systems had permitted employees to arbitrate wage and hour claims as a group, if they wanted to,” rather than requiring individual arbitration, “the outcome of the case would likely have been different," he said.

Employers should keep in mind that the 7th Circuit’s ruling only applies to employees who have rights under the NLRA, Kirby said. “It wouldn’t necessarily apply to managers or supervisors.”

Tell Employees NLRA Rights Aren’t Waived

In its Cellular Sales ruling, the 8th Circuit said that requiring individual arbitration is permissible, but it found that the relevant agreement was unenforceable because the language was too vague.

The court said the broad language could be interpreted as infringing on an employee’s right to engage in concerted activity or to file an unfair labor practices charge with the NLRB.

For this reason, employers may want to use language that makes it clear to employees that the waiver isn’t an attempt to prevent them from exercising their rights under the NLRA or to prevent them from bringing charges before the NLRB, Daming said.

“The language would have to be pretty specific, referencing Section 7 of the NLRA and also letting employees know they have a right to file a charge with the board,” she noted.

Employers Should ‘Stay the Course’

Attorneys told SHRM Online that employers shouldn’t panic.

“I don’t think companies should give up,” said Robert Friedman, an attorney with Littler in Dallas. Friedman is a co‐chair of Littler’s alternative dispute resolution practice group.

“It’s important to note that the Epic Systems decision is the minority opinion,” he said.

The 7th Circuit’s position has been rejected by several federal courts of appeals, as well as many district courts.

“Employers should stay the course, pending guidance from the Supreme Court,” Friedman said.

Lisa Nagele-Piazza, SHRM-SCP, J.D., is the senior legal editor for SHRM. 



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