United States: What to Watch - Supreme Court to Consider Whether Agreements to Waive Employees' Class or Collective Action Rights are Enforceable

In recent years, employers have increasingly been subject to class and collective actions lawsuits by employees alleging various employment law violations, including claims under the Fair Labor Standards Act. In response, employers have attempted to limit their exposure to such suits by requiring employees to enter into arbitration agreements whereby the employees waive their rights to pursue claims in court and agree instead to binding arbitration. As a part of those agreements, employers may also require employees to waive their rights to class and collective actions so that all disputes are resolved on a bilateral basis. Class and collective actions are extremely costly for employers, and these agreements to arbitrate outside of the class and collective action framework, and outside of the court system, allow the parties to settle disputes in a cost-effective manner. Arbitration is also typically confidential, which means that any resolution will not be reported to the public and will not create any binding precedent that could be used against an employer in a subsequent dispute. However, some employers may decide not to enter into arbitration agreements and prefer to settle claims on a class or collective basis because it provides finality, and the employer does not have to worry about similar claims arising from similarly situated employees in the future. Employees may prefer class and collective claims because it expands the plaintiff pool thereby decreasing the legal costs to any one individual plaintiff. The threat of widespread liability to a class may also persuade an employer to take claims seriously early in the process and provide leverage for settlement.

These types of arbitration agreements with employees have faced significant legal challenges, with courts and administrative agencies issuing conflicting opinions. Specifically, the 2nd¹, 5th², and 8th³ Circuit Courts of Appeal have found that clauses waiving an employee's right to pursue class claims and opting for arbitration are enforceable under the Federal Arbitration Act (FAA). The 6th⁴, 7th⁵, and 9th⁶ Circuit Courts of Appeal, as well as the National Labor Relations Board (NLRB), have all found that employers violate the National Labor Relations Act (NLRA) when they require employees to enter into arbitration agreements that preclude them from bringing employment-related class or collective actions in court. Courts and administrative agencies refusing to enforce class and collective action waivers in the employment context have found that these arbitration agreements violate the NLRA's Section 7 protections that give employees the right to engage in protected concerted activity.

The NLRB filed briefing in the matter arguing that such waivers are unenforceable as a violation of the NLRA. On June 16, 2017, the Department of Justice (DOJ) reversed its prior position and filed briefing opposing the NLRB's interpretations and arguing that class action waivers of employment-related claims in arbitration agreements are enforceable unless they are inconsistent with validity requirements under the FAA. In its brief, the DOJ acknowledged that it had "previously filed a petition for a writ of certiorari...defending the Board's view that agreements of the sort at issue here are unenforceable."  "After the change in administration, the Office has reconsidered the issue and has reached the opposite conclusion." 

This Supreme Court decision will seek to rectify the purportedly competing language of the FAA and Section 7 of the NLRA and will have a significant impact on employers' ability to limit legal exposure for certain employment-related claims going forward. It will hopefully finally provide clarity on a topic that has created much disagreement among courts and federal agencies.

Oral arguments in the consolidated Supreme Court case are set for October 2, 2017.

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¹Sutherland v. Ernst & Young, 726 F.3d 290 (2d Cir. 2013).

²D.R. Horton, Inc. v. N.L.R.B., 737 F.3d 344 (5th Cir. 2013); Murphy Oil USA, Inc. v. N.L.R.B., 808 F.3d 1013 (5th Cir. 2015).

³Cellular Sales of Missouri, LLC v. N.L.R.B., 824 F.3d 772 (8th Cir. 2016).

⁴NLRB v. Alt. Entm't, Inc., No. 16-1385, 2017 U.S. App. LEXIS 9272 (6th Cir. May 26, 2017).

⁵Lewis v. Epic Systems Corp., 823 F.3d 1147 (7th Cir. 2016).

⁶Morris v. Ernst & Young LLP, No. 13-16599, 2016 WL 4433080 (9th Cir. Aug. 22, 2016).

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