Arbitration Agreement that Restricted Minimum-Wage Claim Found Invalid

By Jeffrey L. Rhodes Jan 27, 2016
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An arbitration agreement signed by a massage-therapist-in-training was invalid because it limited her procedural protections under the Fair Labor Standards Act (FLSA), the 10th U.S. Circuit Court of Appeals ruled.

Rhonda Nesbitt was enrolled in the Denver School of Massage Therapy. The school is one of 31 associated for-profit occupational schools that provide education in massage therapy and/or esthetics. Nesbitt signed an enrollment agreement that included an arbitration clause. That clause stated that all claims she might have against the school must be resolved in arbitration, and thus it limited certain rights that she might have, including the right to maintain a court action. It also stated that the agreement was governed by the commercial rules of the American Arbitration Association, “applying federal law to the fullest extent possible.”

Nesbitt claimed that, during her education, she was required to provide massage therapy services to members of the public without compensation. She filed a class action against the school in the U.S. District Court for the District of Colorado. In the district court, the school moved to stay the proceedings and compel Nesbitt to arbitrate her individual claims against the defendants. The school cited the arbitration paragraph of the enrollment agreement that Nesbitt signed to argue that she could not proceed with a court action. Nesbitt argued, however, that the enrollment agreement was unenforceable because it effectively deprived her of her rights to vindicate her claims under the FLSA. The district court agreed with Nesbitt and refused to enforce the arbitration agreement. The school appealed the decision to the 10th Circuit.

The 10th Circuit reasoned that federal law generally supports the enforcement of arbitration agreements. Nevertheless, there is an exception where statutory rights are being limited by such an agreement. This exception requires that a party signing an arbitration agreement cannot be precluded from effectively vindicating his or her federal statutory rights in the arbitral forum. This can occur where an arbitration agreement requires the individual to pay significant monies to pursue a claim that would not be required in a federal court action under the governing law.

The 10th Circuit found that, because Nesbitt would not be required to pay an arbitrator’s fees if she filed in federal court, the arbitration clause was problematic. Under the commercial rules of the American Arbitration Association, each party typically has to pay the arbitration fees, which include the arbitrator’s fee for services. Nesbitt submitted an affidavit stating that those fees alone would be between $2,320 and $12,487, which she could not afford to pay. However, were she to file suit under the FLSA, Nesbitt would not be required to pay any such fees. The school argued that the agreement stated that the arbitrator would have to apply federal law to the fullest extent possible, and thus the arbitrator would decline to impose such fees upon Nesbitt. Yet the 10th Circuit found that the possibility of Nesbitt having to pay arbitrator fees, and possibly her own attorney fees, would so dissuade her from pursuing her claims as to restrict her from proceeding with arbitration.

The 10th Circuit thus agreed with Nesbitt and found that the terms of the arbitration clause prevented her from effectively vindicating her federal statutory rights. Therefore, the 10th Circuit invalidated the arbitration agreement and allowed Nesbitt to proceed in federal court with her claims.

Professional Pointer: Many employers use arbitration agreements to discourage employee claims or control their legal costs from such claims. At the same time, many federal courts are finding these agreements to be unenforceable due to deficiencies in the procedures they provide. Employers should carefully evaluate the terms of any arbitration agreement with an employee and make sure that the terms do not limit the employee’s federal statutory rights.

Jeffrey L. Rhodes is an attorney with Doumar Martin PLLC in Arlington, Va.

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