Mr. Mavros

Hospitality Law

Class Action Waivers in Employment

By John Mavros, Attorney at Law, Partner, Fisher & Phillips, LLP

Employment arbitration agreements commonly include mandatory class action waivers. Class action waivers can be a powerful tool for employers to prevent potentially devastating class action lawsuits. Until several months ago, employers didn't have to think twice about whether a class waiver was a lawful part of their arbitration agreement. That all changed when Federal Circuit Courts in Lewis v. Epic Systems (7th Circuit) and Morris v. Ernst & Young (9th Circuit) held that class action waivers violate the National Labor Relations Act's guarantee of collective action and therefore could not be enforced under the Federal Arbitration Act. These decisions have created a circuit split between Federal courts across the country. This article will survey this treacherous legal landscape and share some guidance for employers' arbitration agreements during these uncertain times.

The Benefits of Arbitration Agreements in Employment

Over the past decade, an arbitration agreement presented to a new employee has become as commonplace as a ticket presented to a speeding driver. Employers typically incorporate arbitration agreements into their new hire packets to reduce risk. First, it shifts the venue for claims between the parties from a court of law to an arbitrator which can streamline litigation, making it faster and less burdensome. For example, arbitration can free the parties from stringent timelines, deadlines, and discovery rules that would otherwise need to be followed in civil court. Second, arbitration ensures that an impartial retired judge (or attorney) will decide the merits of the case. A jury is more likely to be sympathetic to an allegedly wronged employee which could award hefty penalties and/or punitive damages for perceived malicious conduct. Third, an arbitration agreement creates a disincentive for frivolous lawsuits. Former employees (and their attorneys) are less likely to pursue a claim if they know they have to convince a seasoned arbitrator, as opposed to a jury, that they were wronged.

Many legal experts agree that one of the most beneficial components of an arbitration agreement is the class action waiver. A meritorious class action lawsuit permits employee's to aggregate hundreds (and sometimes thousands) of claims into one lawsuit, which in some cases, has potential for liability in the millions of dollars. By requiring an arbitration agreement with a class action waiver, an employee waives their right to bring a class action on behalf of other "similarly situated" employees. In other words, it limits an employee to a "bilateral" claim - that is, a claim between the employee and the employer only. If a hotel or management company is a large employer, a class action waiver could save a business from potential bankruptcy.

Courts have historically upheld mandatory arbitration agreements with class action waivers in reliance on the Federal Arbitration Act ("FAA"). To be sure, the FAA was passed by Congress to protect arbitration agreements from "judicial hostility towards arbitration." AT&T Mobility LLC v. Concepcion. Courts have long emphasized that the FAA reflects a national policy favoring arbitration. The FAA is broadly applied to arbitration agreements that affect interstate commerce - which is almost any arbitration agreement. Given the FAA's reach, employers have generally had little problem enforcing their arbitration agreements. However, the tide now appears to be turning.

The NLRB Views Class Action Waivers as Unlawful

For those who may not be aware, the National Labor Relations Board ("NLRB") is a federal agency whose goal is to protect the rights of private sector employees to join together, with or without a union, to improve their wages and working conditions. After President Obama appointed 3 new NLRB Members (of 5 total) and a General Counsel in 2010, critics have argued that the "Obama NLRB" sometimes acts more like an advocate than an umpire.

In 2012, the NLRB issued one of its most controversial rulings - D.R. Horton v. NLRB. In that decision, the NLRB found that class action waivers in arbitration agreements violated the National Labor Relations Act's ("NLRA") guarantee of an "unwaiveable substantive right to collective litigation." Despite this finding, D.R. Horton did not necessarily invalidate class action waivers across the country because every Federal court had rejected it.

For Years, Federal Circuit Courts Have Upheld Class Action Waivers

For nearly 4 years, the NLRB's D.R. Horton rationale had been flatly rejected by every Federal Circuit Court to analyze the issue. Between 2013 and May 2016, the 2nd Circuit (New York, Connecticut, and Vermont), the 5th Circuit (Texas, Louisiana, and Mississippi), the 8th Circuit (Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota), and the 11th Circuit (Alabama, Florida, and Georgia) upheld class/collective action waivers pursuant to the FAA. These Federal courts rejected D.R Horton and found that the FAA governs -- not the NLRA. Courts generally reasoned that the strong congressional policy favoring arbitration in the FAA was not overcome by the NLRA's general provisions protecting the rights to organize and to engage in various forms of protected concerted activity. The Fifth Circuit went on to explain: "Every one of our sister circuits to consider the issue has either suggested or expressly stated that they would not defer to the NLRB's rationale, and held arbitration agreements containing class waivers enforceable."

The NLRB however continued to chart its own course. In 2014, the NLRB again found that a class action waiver was unlawful. Murphy Oil USA, Inc. v. NLRB. The NLRB even boldly remarked that the employer's motion to compel arbitration was brought "with an illegal objective."

Shortly thereafter, when the NLRB's Murphy Oil decision was on appeal, the Fifth Circuit again rejected the NLRB's reasoning. Interestingly, the Fifth Circuit made clear that it did not appreciate the NLRB's tone: "Though the Board might not need to acquiesce in our decisions, it is a bit bold for it to hold that an employer who followed the reasoning of our D.R. Horton decision had no basis in fact or law or an 'illegal objective' in doing so. The Board might want to strike a more respectful balance between its views and those of circuit courts reviewing its orders." The viability of class action waivers seemed secure, but it would not last long.

The Tide Has Shifted Against Class Action Waivers (Lewis v. Epic Systems and Morris v. Ernst and Young)

In a seismic shift, two Federal circuit courts struck down class action waivers in arbitration agreements under the NLRA - something that every other Federal Circuit Court had previously refused to do.

In May 2016, the 7th Circuit Court of Appeals (Illinois, Indiana, and Wisconsin) became the first appeals court to adopt D.R. Horton and find that class/collective action waivers violate the NLRA. The Court found that the arbitration agreement at issue impermissibly precluded collective arbitration or collection action in any forum. See Lewis v. Epic Systems Corp.

In August 2016, the 9th Circuit Court of Appeals (California, Washington, Arizona, Nevada, Oregon, Idaho, Montana, and Alaska) joined the 7th Circuit and issued a decision also siding with the NLRB. See Morris v. Ernst & Young, LLP. The 9th Circuit decision proved that the 7th Circuit's Lewis decision was not an outlier.

In September 2016, employers were given some reprieve when the 2nd Circuit Court of Appeals (NY, Connecticut, and Vermont) held that class action waivers are not unlawful. Patterson v. Raymours Furniture Co. However, the 2nd Circuit's support was less than enthusiastic. The 2nd Circuit stated: "If we were writing on a clean slate we might well be persuaded, for the reasons forcefully stated … in Lewis and Morris, to join the Seventh and Ninth Circuits and hold that the EAP's waiver of collective action is unenforceable." These ominous musings make it seem as though the 2nd Circuit is not completely convinced that class action waivers are lawful.

President-Elect Trump's Nomination of a New Supreme Court Justice Could Resolve the Circuit Split

There is now a clear circuit split between Federal courts across the country - the Seventh and Ninth Circuits v. the Second, Fifth, Eighth, and Eleventh Circuits. On September 2, 2016, Epic Systems filed a petition for certiorari with the US Supreme Court to appeal the 7th Circuit's invalidation of their mandatory class action waiver. Shortly thereafter, Ernst and Young filed a petition for certiorari to appeal the 9th Circuit's similar ruling. Many experts agree that the Supreme Court will need to resolve the split soon. As of December 2016, no decision had been made by the US Supreme Court to accept or deny these petitions for certiorari.

The election of President-elect Trump will ultimately influence whether class action waivers are enforceable. In light of the untimely death of Justice Antonin Scalia, Trump's nomination of Scalia's replacement is of utmost importance. If Trump nominates a new justice that share's Justice Scalia's view, it could make it easier for employers to rely on class waivers and prevent potentially catastrophic liability. But regardless of who fills Justice Scalia's shoes, all employers should take steps to evaluate their arbitration agreements.

Guidance for Employers

The viability of mandatory class waivers is in flux until the US Supreme Court provides more definitive guidance. Whether an employer's class action waiver is enforceable will depend on a number of factors, including the employer's jurisdiction. In light of increased judicial hostility to class action waivers, here are a few strategies/tips for employers:

  • If an express class action waiver is a top priority, employees can be given the choice to exclude themselves from the class action waiver by checking an "opt-out" box in the arbitration agreement. This lends credence to the argument that the class waiver was voluntary.

  • Ensure that the agreement is separate from any general employee handbook arbitration policy to ensure that the employee voluntarily enters into a clear and unmistakable "agreement to arbitrate."

  • If an express class action waiver is of secondary importance, the agreement can be "silent" as to any class waiver, but it must make clear that the agreement is "bilateral" (i.e. between the employee and the company only). This could support the Stolt-Nielsen argument that class-wide arbitration is not authorized by an agreement between the employee and the employer only.

  • Include a clause that requires the court, not an arbitrator, to decide the question of whether the arbitration agreement permits class arbitration of claims. Employers will be best served by having a court of law decide this question.

  • Ensure that the agreement does not limit any remedies before administrative agencies, such as the NLRB or the EEOC.

Employers who are using arbitration agreements and/or thinking about implementing a class action waiver should consult experienced labor and employment counsel. Until the US Supreme Court finally addresses this issue, it is important that all arbitration agreements be evaluated to ensure the best possible chance for enforcement.

This article provides an overview of the law and is not intended to be, nor should it be construed as legal advice for any particular fact situation.

John Mavros, Attorney at Law, is a partner in Fisher Phillips’ Irvine office. He represents employers with labor and employment law, such as unpaid compensation claims, including unpaid minimum wages, overtime, meal/rest period premiums, vacation pay, and/or business expenses, on both an individual and class action basis. Mr. Mavros defends businesses involved in civil litigation or arbitration. This includes defending claims brought before the Division of Labor Standards Enforcement (DLSE aka the Labor Board) and the California Unemployment Insurance Appeals Board. He assists employers with employee handbook preparation, wage/hour audits, new hire policies, employee compensation plans, severance agreements, reductions in force, and day-to-day workforce issues. Mr. Mavros can be contacted at 949-798-2134 or jmavros@laborlawyers.com Extended Bio...

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