HR HEADS-UP: SUPREME COURT APPROVES ARBITRATION AGREEMENTS THAT PRECLUDE PARTICIPATION IN CLASS ACTION SUITS
The United States Supreme Court has just resolved an important dispute among lower federal courts involving mandatory arbitration provisions in employment contracts. In a case involving Epic Systems Corp., the Court held that contract provisions are enforceable that require individual or one-on-one arbitration, while precluding employee participation in class action suits. Lower federal courts had reached inconsistent decisions on this issue, including the Seventh Circuit Court of Appeals, which previously held such arbitration provisions to be unenforceable. The Seventh Circuit is significant because appeals from Wisconsin federal trial courts are decided there.
The Supreme Court recognized as a starting point in Epic Systems Corp. v. Lewis, decided May 21, 2018, that federal law and policy strongly favor arbitration as an alternative dispute resolution procedure. The Federal Arbitration Act, in particular, provides that arbitration provisions in contracts should be enforced, according to their terms, just as any other contract provision would be enforced. Agreements to arbitrate, according to Section Two of the Act, are “valid, irrevocable, and enforceable, save upon such terms as exist at law or in equity for the revocation of any contract.” Under this standard, the only recognized exceptions to enforcement have involved arbitration provisions procured by impermissible means, such as fraud, duress, unconscionability, etc.
The Supreme Court then held that enforceable arbitration provisions may exclude participation in class actions, whether in court or as a collective arbitration. The Court reasoned that the procedures necessary for a class action are inherently inconsistent with the fundamental attributes of arbitration. The Court identified some of the defining attributes of “bilateral” arbitration as including stream-lined procedures, efficiency, procedures tailored to specific disputes, confidentiality, etc.
The Supreme Court also expressly rejected the argument that prohibiting class action participation violated the right created by the National Labor Relations Act to engage in collective and/or concerted activity. The Supreme Court concluded that the right to engage in collective activity under the National Labor Relations Act is limited to organizing or unionizing activity rather than litigation of employee disputes.
The takeaway from the Supreme Court’s Epic Systems decision is that arbitration clauses in employment contracts will be rigorously enforced, even if they include prohibitions on participation in class action litigation. The Court’s decision is clear and emphatic, with no apparent ambiguity or nuance.
The Supreme Court’s decision suggests significant reasons for employers to include arbitration provisions in their employment agreements. Most compelling is cost advantages. Defending a class action in an employment dispute, such as over wages or overtime, can be extremely expensive, even if the employer is ultimately successful. The cost of defending such actions is inherently substantial and the liability risk, if unsuccessful, can be devastating. The amount that may be owed to a large class of employees can obviously be considerable, and most wage claims are brought under statutes that include fee-shifting provisions, meaning that the opposing parties’ attorneys’ fees must also be paid. The cost advantages of an arbitration provision that prohibits class action participation by employees, therefore, may be significant.
Employers should be aware, however, that arbitration is not cost-free. The parties to arbitration will be obligated to pay the arbitrators for their time, usually on an hourly basis. Costs may also include the expense of professional court reporters to transcribe evidentiary proceedings. The obligation to pay arbitration costs exists independent of the outcome of the arbitration, and usually is borne disproportionately by the employer. As a practical matter, moreover, most arbitrators require an up-front deposit for their estimated costs. By contrast, the cost of a judge’s time in a court proceeding is not imposed directly on the parties.
Drafting effective arbitration provisions suitable to an employer’s particular circumstances should be done with careful consideration. While courts now may scrupulously enforce arbitration clauses, their utility as actual dispute resolution procedures depends on a variety of factors. Among the items that should be included are the following: (1) procedural rules to be followed, such as arbitration rules promulgated by the American Arbitration Association; (2) procedure for selecting arbitrators; (3) time limits for completing arbitration; (4) limits on discovery and other litigation practice; (5) specifications of arbitrator qualifications specific to the employer’s circumstances; (6) choice of law and venue provision; (7) strict confidentiality requirements; and (8) limitation on appeal rights.
In the end, the advantages to employers of avoiding entanglement in class actions with employees cannot be overstated. Almost all of the statutory bases that underlie employee class actions involve potential attorney fee-shifting, multiple damages or exemplary damages, with potentially large numbers of individual employees bringing aggregate claims. The Supreme Court’s Epic Systems decision opens the door for employers to utilize arbitration provisions that will effectively protect against class action involvement. Employers that are not presently incorporating such provisions into their employment agreements should consider such provisions, including the details of how arbitration will be effectively and efficiently conducted, but also limiting class action participation.
Employers who do not otherwise utilize written employment agreements may, nonetheless, request new employees to sign a stand-alone agreement to arbitrate disputes relating to the employment. The enforceability of agreements to arbitrate under the Federal Arbitration Act does not require incorporation into a more comprehensive written agreement. Employers may require new hires to sign a separate and discrete agreement to arbitrate employment disputes at the commencement of employment. Employers may also require existing employees to sign an agreement to arbitrate as a condition of continued employment, but the employer should provide some additional consideration for such a mid-term requirement.