Supreme Court to Rule on Class-Action Waivers

By Allen Smith, J.D. Jan 18, 2017
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​Nonunion and union employers alike will be affected by three cases the U.S. Supreme Court announced on Jan. 13 that it will review to determine whether class-action waivers in arbitration agreements are lawful.

Nonunion employees bring the vast majority of challenges of arbitration agreement waivers, said Steve Bernstein, an attorney with Fisher Phillips in Tampa, Fla. Union employees are more used to arbitration and any accompanying provisions that are part of collective bargaining agreements.

"Any HR professional who works with an organization that has arbitration in place should be very interested in these cases, as the viability of [their] procedures will be on the line," he noted. The Supreme Court consolidated the cases for its review.

The cases will "impact whether arbitration is the preferred device for settling workplace disputes," predicted Michael Lotito, an attorney with Littler in San Francisco and co-chair of the Workplace Policy Institute, the firm's government affairs branch.

The National Labor Relations Board (NLRB) and the 7th and 9th U.S. Circuit Courts of Appeals have found that class-action waivers in arbitration agreements violate the National Labor Relations Act (NLRA). The 2nd, 5th and 8th circuit courts have upheld such waivers as lawful. The Supreme Court will resolve this split.

Each Case Alleges FLSA Violations

The consolidated cases before the Supreme Court involve:

  • A wage and hour collective action against Epic Systems, a health care software company, alleging that it misclassified technical writers as exempt in violation of the Fair Labor Standards Act (FLSA) (Lewis v. Epic Systems Corp., 15-2997 (7th Cir. 2016)). The 7th Circuit affirmed the district court's denial of Epic's motion to compel arbitration, concluding that the arbitration provision's bar on employees seeking any class action of wage and hour disputes violated the NLRA.
  • A collective action claiming that Ernst & Young misclassified employees to deny overtime wages in violation of the FLSA and California labor laws (Morris v. Ernst & Young, 5:12-cv-04964 (9th Cir. 2016)). The 9th Circuit held that the employer violated the NLRA by requiring employees to sign an arbitration agreement precluding them from bringing a class action regarding wages, hours and employment conditions.

[SHRM members-only HR Q&A: What are the California rules regarding mandatory arbitration agreements and how do they differ from federal law?]

  • A collective action against Murphy Oil USA Inc., which operates retail gas stations in several states, alleging that the company violated the FLSA (Murphy Oil USA Inc. v. NLRB, 14-60800 5th Cir. 2015)). The district court granted the company's motion to dismiss the collective action and compel arbitration. The 5th Circuit affirmed, rejecting the board's holding in a previous case, D.R. Horton Inc. v. NLRB, 357 N.L.R.B. 184 (2012), that the NLRA bans class-action waivers in arbitration agreements. (The 5th Circuit had previously reversed the NLRB's holding in D.R. Horton Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013).) "An employer does not engage in unfair labor practices by maintaining and enforcing an arbitration agreement prohibiting employee class or collective actions and requiring employment-related claims to be resolved through individual arbitration," the 5th Circuit stated in Murphy Oil, again reversing an NLRB decision.

Despite the 5th Circuit's holdings, the NLRB has continued to rule that class-action waivers in arbitration agreements violate the NLRA, relying on the rationale set out in the board's D.R. Horton decision. In that case it ruled that class-action waivers in arbitration agreements unlawfully restrict employees' NLRA right to engage in concerted, protected activity, notwithstanding the Federal Arbitration Act (FAA), which generally makes employment-related arbitration agreements enforceable. In continuing to rely on the board's holding in D.R. Horton, the NLRB has been following a "policy of nonacquiescence" and not followed appeals court decisions that disagree with its opinions.

Arbitration's Pros and Cons

The Supreme Court has ruled that arbitration is favored, Bernstein noted. It's a good way to clear the dockets, he added, saying that the NLRB's holdings fly in the face of "a burgeoning trend that encourages alternative dispute resolution."

Arbitration provides employers with more certainty in the process and typically is concluded within months rather than years, he said.

"There is a lot more at stake for employees' attorneys than employees themselves," said Ron Chapman, an attorney with Ogletree Deakins in Dallas. "In class actions, the attorneys typically recover a lot more money than the employees ever do."

However, plaintiffs' attorney Michael Palmer, a lawyer with Sanford Heisler in New York City, said arbitration is often expensive for employers and that arbitration decisions are difficult to overturn.

But Bernstein said arbitration can be cheaper since it is much more efficient than litigation.

Michael Jones, an attorney with Reed Smith in Philadelphia, agreed. "Arbitration agreements have become increasingly popular for employers as they dramatically reduce the costs of defending against lawsuits filed by employees," he noted.

Class Action: Right or Procedure?

"The right to join together with other employees to protest working conditions is extremely important, and it would be deeply disappointing if the Supreme Court undermined this right," Palmer said.

But Chapman said that courts have long held that there is no substantive right to proceed as a class action because it is merely a legal procedure.

Even if employees are barred from a class action, they still can assert their claims and engage in concerted activities for their mutual benefit, he noted. For example, while pursuing separate legal proceedings, they can still hire the same lawyer, split costs, share information and call the same witnesses.

"By elevating the procedure of a class action to a substantive right, the NLRB has put form over substance," he said.

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