On Monday, May 21, 2018, the U.S. Supreme Court ruled in Epic Systems Corp. v. Lewis that employers may require their employees to submit their employment claims to individual arbitration proceedings, waiving their ability to participate in class and collective actions. The Court, in a historic and sharply-divided 5-4 opinion, reversed the decisions of prior federal circuits holding the contrary and set the stage for monumental changes in the way employers approach mandatory arbitration.
The Relevant Case Facts
In its opinion, the Court decided three different cases, Epic Systems Corp. v. Lewis, Ernst & Young LLP v. Morris, and NLRB v. Murphy Oil USA, Inc., each of which concerned an employment agreement requiring individual arbitration of all employment-related claims. Subsequently, these employees filed class or collective actions in court, and the employers moved to compel individual arbitration pursuant to the applicable employment agreements. For example, in Ernst, a former employee sought to bring a collective action alleging that Ernst & Young had misclassified its junior accountants and withheld overtime pay under the Fair Labor Standards Act (“FLSA”).
The Employees’ Legal Arguments
The employees in all three cases before the Supreme Court argued the National Labor Relations Act (the “NRLA”) required the Court to invalidate the parties’ agreement to arbitrate claims under the Federal Arbitration Act (“FAA”) on an individual basis. The NLRA confers employees the right to engage in certain collective activities for their “mutual aid or protection.” The employees argued such collective activities included the pursuit of employment-related claims on a class or collective basis.
The Court’s Holding
In an opinion by Justice Neil Gorsuch, the Court upheld arbitration clauses in employment agreements that disallow class and collective actions. The Court reasoned it was enforcing the right of employers and employees to agree to resolve any and all disputes between them through individualized arbitration. The Court rejected the employees’ argument that the language of the NLRA was intended to create an exception to the FAA. Rather, the Court held the NLRA’s protection of “concerted activity for… other mutual aid or protection” cannot be read to encompass the collective pursuit of legal claims. While a party can still seek to invalidate an employment agreement containing an arbitration clause on the grounds that the agreement is unconscionable or was procured by fraud or duress, arbitration provisions will no longer be invalidated merely because they proscribe class and collective action proceedings.
Justice Ruth Bader Ginsburg, writing for the dissent, cautioned that class action waivers may have the untoward effect of deterring claims because employees may be too fearful of retaliation to pursue a claim individually. She further expressed the view that the Court’s decision cannot be read to limit disparate impact or pattern or practice discrimination claims, which are typically brought as class actions and rely on class-wide proof.
Practical Effect for Employers
The Epic opinion removes any doubt that employers can include in employment agreements mandatory arbitration clauses that prohibit class and collective actions. The initial consequence feared by the plaintiff’s bar is that individual employment claims of nominal dollar value will not be prosecuted because the cost of prosecution will outweigh the potential recovery. On the other hand, employers could also see their costs multiply if numerous identical claims filed against the employer cannot be resolved on a class or collective basis. Moreover, expanding the reach of mandatory arbitration may stall the development of judicial precedence in certain areas, as arbitration decisions are often confidential and non-precedential. Nevertheless, for now, the Supreme Court’s ruling is a welcomed change for many employers seeking quick resolution of employment claims on an individualized basis, without having to reckon with the coercive power of the class action mechanism. Employers should consult with a Taft attorney as to the costs and benefits for mandating arbitration of employment claims in individual proceedings, and also discuss how to craft the arbitration clause (if it is to be used) to provide for a streamlined arbitral process.