Class Action Waivers in Employment

By John Mavros Attorney at Law, Partner, Fisher & Phillips, LLP | December 04, 2016

Employment arbitration agreements commonly include mandatory class action waivers. Class action waivers can be a powerful tool for employers to prevent potentially devastating class action lawsuits. Until several months ago, employers didn’t have to think twice about whether a class waiver was a lawful part of their arbitration agreement. That all changed when Federal Circuit Courts in Lewis v. Epic Systems (7th Circuit) and Morris v. Ernst & Young (9th Circuit) held that class action waivers violate the National Labor Relations Act’s guarantee of collective action and therefore could not be enforced under the Federal Arbitration Act. These decisions have created a circuit split between Federal courts across the country. This article will survey this treacherous legal landscape and share some guidance for employers’ arbitration agreements during these uncertain times.

The Benefits of Arbitration Agreements in Employment

Over the past decade, an arbitration agreement presented to a new employee has become as commonplace as a ticket presented to a speeding driver. Employers typically incorporate arbitration agreements into their new hire packets to reduce risk. First, it shifts the venue for claims between the parties from a court of law to an arbitrator which can streamline litigation, making it faster and less burdensome. For example, arbitration can free the parties from stringent timelines, deadlines, and discovery rules that would otherwise need to be followed in civil court. Second, arbitration ensures that an impartial retired judge (or attorney) will decide the merits of the case. A jury is more likely to be sympathetic to an allegedly wronged employee which could award hefty penalties and/or punitive damages for perceived malicious conduct. Third, an arbitration agreement creates a disincentive for frivolous lawsuits. Former employees (and their attorneys) are less likely to pursue a claim if they know they have to convince a seasoned arbitrator, as opposed to a jury, that they were wronged.

Many legal experts agree that one of the most beneficial components of an arbitration agreement is the class action waiver. A meritorious class action lawsuit permits employee’s to aggregate hundreds (and sometimes thousands) of claims into one lawsuit, which in some cases, has potential for liability in the millions of dollars. By requiring an arbitration agreement with a class action waiver, an employee waives their right to bring a class action on behalf of other “similarly situated” employees. In other words, it limits an employee to a “bilateral” claim – that is, a claim between the employee and the employer only. If a hotel or management company is a large employer, a class action waiver could save a business from potential bankruptcy.

Courts have historically upheld mandatory arbitration agreements with class action waivers in reliance on the Federal Arbitration Act (“FAA”). To be sure, the FAA was passed by Congress to protect arbitration agreements from “judicial hostility towards arbitration.” AT&T Mobility LLC v. Concepcion. Courts have long emphasized that the FAA reflects a national policy favoring arbitration. The FAA is broadly applied to arbitration agreements that affect interstate commerce – which is almost any arbitration agreement. Given the FAA’s reach, employers have generally had little problem enforcing their arbitration agreements. However, the tide now appears to be turning.

The NLRB Views Class Action Waivers as Unlawful

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