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Arbitration in Class Action Wage and Hour Cases: An Overview

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By Lauren M. Larrick

Employment Liability Newsletter
August 2018

Arbitration is a term that has become increasingly more important in the labor and employment sector. Believing arbitration to be beneficial, an increasing number of employers are requiring that employees sign arbitration clauses. However, before making such a significant company decision it is important to understand what arbitration really means and the effects it can have on resolving a dispute. If an employer does decide to require employees to sign arbitration agreements, it is important to have an experienced attorney draft the language to decrease the risk of litigation. It is also important to understand the legal landscape and enforceability of such clauses before deciding to implement them into an employer’s policies and practices.

History of Arbitration in Employment Law

In 1925, Congress enacted the Federal Arbitration Act to support a limited, modest system of private dispute resolution for commercial disputes.[1]This original intent has since expanded to a national policy favoring arbitration, which places arbitration agreements on equal footing with all other contracts.[2]The Supreme Court has unequivocally held that the FAA is applicable in state courts as well as federal courts.[3]

Since the 1990s, arbitration has become exceedingly more popular.  The Civil Rights Act of 1991 vested greater authority in juries to decide employment discrimination cases. To avoid the unpredictability of jurors, employers began preferring arbitration as a means to resolve employment disputes. From 1997 to 2001, the number of employment cases filed with the American Arbitration Association (AAA) increased 60%, from 1,347 to 2,159.[4]

Effect of Arbitration

Arbitration can be more cost-effective than litigation or trial because it is quicker and less complicated than court proceedings. For example, arbitration proceedings are generally resolved within months compared to court cases, which can last for several years. In arbitration, both parties can select an experienced decision-maker, oftentimes an expert in the area of relevant law, rather than being assigned a judge at random. Especially in cases where a complex issue of law is involved, an expert in the area does not need to be taught the law, and may be more likely to reach a fair result. In arbitration, there is also no possibility of runaway juries deciding the outcome and issuing punitive damages to companies because of sympathy for the plaintiff. Additional benefits include a higher degree of confidentiality and less formality.[5]

On the other hand, not all arbitrations are significantly cheaper than litigation. While there is less discovery and motion practice involved, arbitration still requires hearing preparation, attendance, discovery and brief-writing. Employers can be less likely to win cases on procedural grounds in arbitration, and some claims are, by statute, not arbitrable.[6]Another important consideration for employers is that arbitration is binding. Unlike court decisions, arbitration decisions are not appealable to a higher court and will only be overturned for very limited reasons, which are provided in the FAA.[7]These reasons include corruption, fraud, and misconduct on behalf of the arbitrator.[8]

Also of great significance, before pursuing arbitration and the merits of an employee’s claim, an employer may end up in court over whether their arbitration agreement is even enforceable.[9]For example, when arbitration fees become too expensive for an individual to afford, courts have found arbitration clauses to be unenforceable.[10]While not determinative, courts have looked favorably upon arbitration clauses that contain opt-out provisions.[11]

These are all considerations that an employer must weigh before deciding that arbitration is the best course.

Arbitration in Wage and Hour Cases

There has been a growing trend in employment class action lawsuits, with numbers reaching an all-time high in 2015.[12]Wage and hour claims make up a significant portion of these claims, because it is easier and less expensive to pursue a class action for violations of the Fair Labor Standards Act than it is for employment discrimination claims. In such an action, multiple, even thousands, of employees who have suffered from minimum wage or overtime violations can sue their employer together in one lawsuit, thereby consolidating attorneys, evidence, witnesses, et cetera.[13]Attorneys are especially drawn to wage and hour class action lawsuits because individual wage and hour violations usually provide only minimal damages, oftentimes not worth filing suit over; however, a class action settlement can result in much higher payout for an attorney.[14]

Employers have tried to counter-act these class action suits by instituting class action waivers in their arbitration agreements. An employee is usually asked to sign this as a condition of employment, wherein she agrees to pursue any and all claims she has against the employer in arbitration, on an individualbasis. This agreement would preclude the employee from participating in a class action lawsuit.

Legality of Class Action Waivers

Previously, four out of the thirteen federal appellate circuit courts had found class action waivers enforceable and, thus, not in violation of the FAA, which features a liberal policy in favor of enforcing arbitration agreements. However, three other circuit courts had disagreed and declined to enforce class action waivers. Those courts held that such agreements interfered with employees’ rights to engage in concerted activity, which is protected by the National Labor Relations Act.[15]

In light of this deep divide between the Circuit Courts, the United States Supreme Court agreed to hear three cases, which it consolidated for purposes of review: the Seventh Circuit’s Epic Systemsdecision, the Ninth Circuit’s Ernst & Young decision, and the Fifth Circuit’s Murphy Oildecision. On May 21stof this year, the Court decided 5 to 4 in favor of class waivers.[16]In other words, the five justices in the majority determined that the FAA requires arbitration agreements between employers and employees calling for individualized proceedings – rather than aggregated claims – to be enforced as written.[17]

This decision will have an immediate and significant impact on class action litigation, especially for wage and hour cases. As a result of the Court’s holding, it is likely that a growing number of employers will start requiring employees to sign class waivers as a contingency to employment, causing the amount of individual employee arbitration claims to increase substantially.

Conclusion

Arbitration clauses and, potentially, class action arbitration waivers can be helpful tools for an employer. However, as this article has illustrated, there are potential drawbacks as well. Despite the fact that the Supreme Court’s decision in Epic Systemsmeans we’re likely to see a decrease in aggregated wage and hour claims and a potential surge in individually-brought claims, employers need to understand the risks and rewards of such provisions before including them in employee agreements. A good attorney can ensure that the language used in any such agreement is designed to comply with the law, reduce litigation, and ultimately lead to a positive impact on business.

[1]Federal Arbitration Act, 9 U.S.C. §§ 1-16; Imre Stephen Szalai, Exploring the Federal Arbitration Act Through The Lens of History, 2016 J. Disp. Resol. 115.

[2]Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 444, 126 S. Ct. 1204, 1208 (2006).

[3]Southland Corp. v. Keating, 465 U.S. 1, 16, 104 S. Ct. 852, 861 (1984).

[4]Theodore Eisenberg & Elizabeth Hill, Arbitration and Litigation of Employment Claims: An Empirical Comparison, Disp. Resol. J., Nov. 2003-Jan. 2004, at 44.

[5]25 ABA Journal Lab. & Emp. Law173.

[6]See for example,Public Citizen, State Laws Regulating Arbitration in Insurance Contracts, https://www.citizen.org/article/state-laws-regulating-arbitration-insurance-contracts-0(last visited Nov. 20, 2017), discussing how some states have statutes prohibiting enforcement of arbitration clauses by insurers.

[7]Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576, 128 S. Ct. 1396 (2008).

[8]Federal Arbitration Act, 9 U.S.C. §§ 10-11.

[9]25 ABA Journal Lab. & Emp. Law173.

[10]Colin E. Thompson and Amy Reagan, AfterConcepcion, Is Your “New” Arbitration Agreement Still Enforceable?American Bar Association: Class Action and Derivative Suits(Feb. 19, 2015), https://beta.americanbar.org/groups/litigation/committees/class-actions/articles/2015/winter2015-0215-four-years-after-concepcion-is-your-new-arbitration-agreement-still-enforceable/.

[11]Id.

[12]Kevin McGowan, Wage and Hour Class Action Boom Called Likely to Last, Bloomberg BNA: Labor & Employment(Jan. 20, 2017), https://www.bna.com/wage-hour-class-n73014450078/.

[13]Findlaw,Wage and Hour Class Action Lawsuits, http://employment.findlaw.com/wages-and-benefits/wage-and-hour-class-action-lawsuits.html(last visited Nov. 20, 2017).

[14]Seehttp://apps.americanbar.org/litigation/committees/employment/articles/spring2015-0415-economic-realities-employment-class-actions.html.

[15]MatthewMall, Circuit Split Deepens over the Enforceability of Class Action Waivers in Employment Disputes, AMERICAN BAR ASSOCIATION: CLASS ACTIONS & DERIVATIVE SUITS (June 1, 2017), https://www.americanbar.org/groups/litigation/committees/class-actions/practice/2017/national-labor-relations-v-alternative-entertainment.html.

[16]Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018).

[17]Id.at 1632.