Earlier today, the U.S. Supreme Court issued a much-anticipated decision that will impact millions of employment contracts across the country and potentially encourage many more employers to require employees to arbitrate employment claims. In a 5-4 opinion written by Justice Neil Gorsuch, the Court ruled that class or collective action waivers in employee arbitration agreements are fully enforceable under the Federal Arbitration Act (FAA) and do not violate employees’ rights under the National Labor Relations Act (NLRA).
What Was the Fight About?
In recent years, employers have seen increasing numbers of employment lawsuits filed as class or collective actions, where employees may pool resources and evidence to assert discrimination, wage and hour, or other employment-related claims. These class and collective actions are very costly to defend, litigate and resolve. In response to the challenges posed by these collective actions, many employers have implemented mandatory arbitration procedures for employment-related claims. Under these procedures, an employee agrees to arbitrate individual employment claims, rather than filing an administrative charge or a lawsuit. Under many arbitration agreements, the employee also specifically waives the right to start or participate in any class action brought by a group of employees against the employer. The FAA, which provides that arbitration agreements “shall be valid, irrevocable, and enforceable,” and which has been broadly construed by federal courts, including the U.S. Supreme Court, seems to support the validity of these agreements.
Two Sides to the Story
The NLRB has historically disagreed with the federal courts. In its 2012 D.R. Horton decision, and in a long line of decisions thereafter, the NLRB asserted that the rights of employees to join together and participate in class actions against an employer is protected “concerted activity” under Section 7 of the NLRA. According to the NLRB, any arbitration agreement in which an employee is compelled to waive that right violates the NLRA and is therefore unenforceable. However, many federal courts, including the Second, Fifth and Eighth Circuits, rejected the NLRB’s theory, finding that employee arbitration agreements containing class action waivers are enforceable under the FAA. Sutherland v. Ernst & Young LLP (2nd Cir. 2013), NLRB v. Murphy Oil USA, Inc. (5th Cir. 2015), Cellular Sales of Missouri, LLC v. NLRB (8th Cir. 2016).
The issue, however, was far from settled. In May 2016, the Seventh Circuit adopted the NLRB’s approach, holding that a class action waiver in an employee arbitration agreement violated the NLRA and could not be enforced. Lewis v. Epic Systems (7th Cir. 2016). The Ninth and Sixth Circuits followed suit over the course of the following year, setting up a split among the Circuits. Morris v. Ernst & Young, LLP (9th Cir. 2016), NLRB v. Alternative Entertainment, Inc. (6th Cir. 2017). The Supreme Court granted cert and consolidated hearing on the three cases from the Seventh, Ninth and Fifth Circuits, presenting an opportunity to definitively answer the question whether an employer may require its employees to sign arbitration agreements containing class action waivers.
How the Story Ends
The Supreme Court settled the issue today. Upholding the validity of class action waivers in arbitration agreements, Justice Gorsuch explained that the FAA unequivocally requires federal courts to enforce arbitration agreements according to their terms, and nothing in the NLRA, which was enacted after the FAA, was intended to negate that requirement. The majority opinion specifically found that Section 7 of the NLRA focuses on an employee’s right to organize and bargain collectively, but it does not create a right to pursue a collective or class action. Chief Justice John G. Roberts Jr. and Justices Anthony M. Kennedy, Clarence Thomas and Samuel A. Alito Jr. joined the majority opinion.
In dissent, Justice Ruth Bader Ginsburg argued that the NLRA was intended to equalize the power imbalance in most employment relationships by allowing employees to band together through collective litigation to improve the terms and conditions of employment. Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan joined in the dissent. However, the majority opinion rejected this notion, observing that absent an explicit reference to collective or class actions, general NLRA language about “other concerted activities” cannot be construed to override the express provisions of the FAA.
The Epilogue for Employers
After today’s Supreme Court decision, employers that already utilize arbitration agreements with class action waivers can be fairly confident that they will be enforceable, assuming they comply with other applicable state contract laws. Employers that do not currently use arbitration programs or use programs without class action waivers are well-advised to consult with legal counsel about the relative costs and benefits of adopting such programs. Although they can be costly and time-consuming to administer, mandatory arbitration programs with class action waivers can help employers preserve confidentiality, resolve claims more quickly and limit potential exposure to collective actions.
Please contact Clark & Gotzler with any questions or concerns about this decision or its potential effect on your organization.