Mr. Schmidt

Hospitality Law

Waiving Goodbye to Class Actions – A Potential Way Out

By Michael C. Schmidt, Partner, Cozen O'Connor

It is no secret by now that employers, including those in the hotel- and hospitality-related industry, continue to be hit with the legal tsunami that are class action lawsuits. Hotel employers are especially vulnerable, with limited defenses, when it comes to wage and hour lawsuits, where a large class of employees allege that their employer failed to pay minimum wage or overtime compensation. That vulnerability has been increased recently by the current economic climate, where employers look for ways to cut certain employee-related costs, and by advances in technology (e.g., the use of Blackberries) that make it more difficult to monitor working hours and activities.

One way to reduce potential exposure for alleged wage and hour violations is to review management’s internal policies and practices to determine whether there are any compliance issues that should and can be addressed before a lawsuit is filed, or before a government agency commences an audit. Another option has been re-affirmed by a federal district court within the Second Circuit, which permitted an employer to obtain a written waiver prohibiting its employees from pursuing employment-related claims on a class-wide basis in court. Such a “class action waiver” may be a valuable strategy for limiting the significant exposure, and leverage, that is presented with class action lawsuits in this context.

The Class Action Dilemma

Wage and hour obligations are generally found in the federal Fair Labor Standards Act (“FLSA”), and in similar state and local laws. These statutes provide significant remedies for aggrieved employees, including compensatory damages equal to the amount of the unpaid wages, as well as additional statutory damages in certain cases equal to 100% of the unpaid wages (under federal law), attorneys’ fees, interest, and costs. The potential monetary exposure increases exponentially because the federal and state wage and hour laws permit aggrieved individuals to bring these cases on behalf of themselves, and as representatives of a proposed class of other similarly situated employees.

For example, the FLSA authorizes multiple-plaintiff lawsuits as “collective actions.” A collective action under the FLSA is procedurally different from a traditional class action under Rule 23 of the Federal Rules of Civil Procedure (the procedural vehicle for prosecuting class-wide claims under state wage and hour laws). While members of a state Rule 23 class are bound by the outcome unless they choose to “opt out” of an action, potential parties to an FLSA collective action are instead required to “opt in.” Whether styled as a collective action or a class action, the impact is the same. Thus, because of the sheer number of individuals who can either opt in for federal collective action purposes, or who are included in a state class action merely by falling within the definition of a broad class of allegedly aggrieved workers, these collective and class actions generally increase the parties’ litigation costs and present unique case management challenges for Judges.

The Arbitration Dilemma

Companies often struggle with the threshold question of whether to require arbitration of employment disputes, rather than proceed through the normal course of litigation in court. Whether arbitration is a desirable dispute resolution method invariably depends on the nature of the particular company and its workforce, and the types of employment disputes that the company views as likely to occur. For some, arbitration is viewed positively because of the potential for a less public, generally quicker and potentially less costly forum. On the other hand, arbitration is seen by some as less predictable in terms of the application of established precedent, more relaxed in terms of procedural and evidentiary rules that might not apply in arbitration to the benefit of an employee presenting his or her case, and much more difficult to obtain relief from a negative outcome.

The current state of the law generally favors reasonable agreements that require the submission of an employment dispute to arbitration. Indeed, back in 1991, the United States Supreme Court strongly approved arbitration of statutory claims in the leading case of Gilmer v. Interstate/Johnson Lane Corp. The Court in Gilmer (a case involving alleged age discrimination) “did not perceive any inherent inconsistency between those [important social policies underlying the employment statutes] . . . and enforcing agreements to arbitrate age discrimination claims.”

Ten years later, the Supreme Court again ruled, in Circuit City Stores, Inc. v. Adams, that agreements to arbitrate employment disputes should be favored and are not unenforceable per se except in cases involving employment contracts of seamen, railroad workers, and similar laborers. While members of Congress have discussed potential legislation to prohibit the use of pre-dispute arbitration agreements in the employment context, unless and until that is done, courts are likely to continue to enforce arbitration agreements that are not determined to be procedurally or substantially unconscionable.

Favoring Class Action Waivers and Arbitration

As noted above, one potential strategy for reducing a hotel employer’s exposure to a class action lawsuit, particularly in the wage and hour context, is to require employees to submit such claims to arbitration, and further require that any arbitration proceed solely on behalf of the individual employee, rather than on behalf of a putative class. Just last month, a federal court in Connecticut, in the Second Circuit, upheld a company’s use of a class action waiver in an employment arbitration agreement, and provided guidance on how to create enforceable waivers.

In Pomposi v. Gamestop, Inc., 2010 WL 147196 (D. Conn. 2010), the plaintiff alleged that his employer failed to pay him minimum wage and overtime compensation in violation of the federal FLSA and Connecticut law. Prior to answering the complaint, the employer moved to dismiss the lawsuit on the basis that the plaintiff freely and voluntarily signed an agreement requiring the submission of any employment dispute to arbitration, and waiving his right to proceed as a class action.

Specifically, the employer created an internal dispute resolution referred to as “C.A.R.E.S.”, or “Concerned Associates Reaching Equitable Solutions.” The C.A.R.E.S. program set forth a mandatory three-step resolution procedure for any employment dispute. First, an employee can speak informally with a supervisor, manager, or Human Resources representative to resolve the dispute. Second, if that process is not successful, the issue would be reviewed and determined by an “Executive Review Officer” in the Human Resources department. Lastly, if that step still does not resolve the issue, the dispute must be submitted to a neutral arbitrator for a final decision that is binding on both parties. Of critical import, is that the rules and procedures of the C.A.R.E.S. program expressly provide that any disputes submitted to arbitration by an employee may proceed only as an individual claim, and that the employee agrees that he or she cannot bring any claims on behalf of a class of employees.

The District Court granted the employer’s motion, and compelled the employee to submit his dispute to arbitration solely on his own behalf. In reaching that decision, the Court noted the existence of the following facts demonstrating that the C.A.R.E.S. program was reasonable and enforceable:

1. The C.A.R.E.S. program was presented to the company’s workforce at a conference, during which all employees were given a brochure and handbook that described the program in detail, and in easily-understood language. The class action waiver included in the program documents was neither hidden nor obscure.

2. The plaintiff (as did the other employees) signed a written acknowledgement form in which he agreed to abide by the C.A.R.E.S. program as a condition to his continued employment with the company. In many states, such as Connecticut and New York, continued employment of an at-will employee is sufficient consideration for entering into an arbitration agreement or class action waiver.

3. Notwithstanding any perceived unequal bargaining power, the plaintiff “speaks and writes in English, graduated from high school, and he completed 60 credits of college course work.” In his acknowledgement form, the plaintiff admitted that he understood the nature and specifics of the program, including the class action waiver.

4. The program did not provide for any mandatory arbitration filing deadline that is contrary to any deadline allowable by law for the type of claim raised, and unequivocally stated that the program applied equally to disputes brought by the company and the employee.

5. The program did not impose any prohibitive fees, stating instead that the filing fee paid by an employee ($125 paid directly to the American Arbitration Association) would be waived when required by law, and can be recouped by a successful employee who can be awarded his or her reasonable attorneys’ fees and costs under the program.

Thus, the plaintiff was required to pursue his claims for minimum wage and overtime compensation in arbitration, rather than through the courts, and could not have his claims proceed on a class action basis. Through its program, determined under the facts of the Pomposi case to be both procedurally and substantively reasonable, the employer effectively limited the potential exposure that it might otherwise have faced if the employee had been permitted to proceed with his wage and hour claims in the normal course through litigation in court. Moreover, the employer’s policy arguably creates a disincentive for other employees (and, perhaps just as importantly, plaintiff’s attorneys) to bring this type of high stakes lawsuit against the company.

It is worth emphasizing that the District Court in Pomposi cautioned that not all class action wavers “will be enforceable in every case.” Instead, and as the Second Circuit Court of Appeals has ruled, such waivers must be viewed on a case-by-case basis to determine enforceability. Nevertheless, if drafted properly, and presented to employees in an effective manner, class action waivers may be a valuable tool in preventing class action lawsuits of these types from being commenced against hotel employers.

Michael C. Schmidt is a member of Cozen O'Connor in the Labor & Employment Practice Group. A portion of his practice is devoted to advising large and small businesses how to avoid litigation and minimize exposure to claims. He has represented clients in the hospitality and restaurant industry in matters involving wage and hour, discrimination and employment contract disputes. Mr. Schmidt is an Adjunct Professor of Law at Touro Law School in Central Islip, N.Y., he teaches employment law. He lectures and conducts seminars for human resources professionals, corporate executives, and lawyers. Mr. Schmidt can be contacted at 212-453-3937 or mschmidt@cozen.com Extended Bio...

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