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May 2018

BREAKING: Class Action Waivers Held Legal in Employment Context—A Big Tool in the Toolbox of Employer-Friendly Preventative Measures

The United States Supreme Court today ruled that an employer can require employees to waive their rights to pursue class action litigation in connection with their employment. This landmark decision provides a much-needed prophylactic tool in stemming the tide of costly class action lawsuits that has plagued employers, both large and small.

In an opinion by the Court’s newest member, Justice Gorsuch, today’s ruling resolves a highly contentious issue on which the lower courts had been sharply divided for nearly six years, starting when the National Labor Relations Board (NLRB) issued its controversial decision in D.R. Horton. In that decision the NLRB held, for the first time, that the National Labor Relations Act (NLRA) prohibits class action waivers in employment arbitration agreements. The rationale was that such waivers acted to prohibit “concerted activities,” such as collective bargaining, which are protected under the NLRA. We have discussed the issue in a previous employment law update.

From 2012 to 2016 most federal and state courts rejected the NLRB’s position. These courts included the Second, Fifth, and Eighth Circuits. In 2016, the Seventh and the Ninth Circuit Courts of Appeals became the first federal appellate courts to side with the NLRB, followed by the Sixth Circuit in 2017. This set the stage for the Supreme Court to hear three consolidated cases (Epic System Corp. v. Lewis; Ernst & Young LLP v. Morris; and NLRB v. Murphy Oil USA, Inc.) to resolve the conflicting holdings.

In an outright rejection of D.R. Horton, the Supreme Court reasoned that “Congress has instructed in the [Federal] Arbitration Act that arbitration agreements providing for individualized proceedings must be enforced, and neither the Arbitration Act’s saving clause nor the NLRA suggests otherwise.” The “savings clause” of the Federal Arbitration Act does not apply, because it allows only grounds for invalidating arbitration agreements that would apply to “any” contract, not “just because it requires bilateral arbitration.” (Emphasis in original.) The Supreme Court further explained that “the Arbitration Act requires courts to enforce agreements to arbitrate, including the terms of arbitration the parties select…These emphatic directions would seem to resolve any argument here.” The Supreme Court made clear that today’s decision “rests largely on the Court’s finding in the Arbitration Act’s ‘emphatic directions’ to enforce arbitration agreements according to their terms, including collective-litigation prohibitions.”

The Supreme Court rejected arguments that the NLRA prohibited class action waivers, pointing out that the NLRA “does not mention class or collective action procedures or even hint at a clear and manifest wish to displace the Arbitration Act.” This is consistent with many other decisions challenging arbitration agreements: “This Court has heard and rejected many efforts to manufacture conflicts between the Arbitration Act and other federal statutes….”

The Supreme Court has generally upheld mandatory class action waivers in arbitration agreements. For example, in the landmark case AT&T Mobility LLC v. Concepcion, which the Court cited frequently in today’s opinion, class action waivers in the consumer context were deemed enforceable.  However, none of the Supreme Court’s previous decisions addressed class action waivers in the employment context. Until now.

Today’s ruling will undoubtedly decrease the number of class action lawsuits here, because employers have a powerful new tool at their disposal. Employers would be wise to immediately review their arbitration policies, and consider revising them to comport with the new ruling.

One California caveat: while this decision is certainly welcome news for California employers, it does not address the state-specific issue of large-scale “representative actions” under California’s Private Attorneys General Act (“PAGA”) which authorizes aggrieved employees to file lawsuits to recover civil penalties on behalf of themselves, other employees, and the State of California for Labor Code violations. The California Supreme Court has made clear that PAGA claims are not subject to arbitration agreements because they seek redress on behalf of the state. Many of the claims that can be pursued in a class action (such as meal and rest breaks) can also pursued in a PAGA action. Therefore, we also advise auditing policies and practices to ensure they are compliant with California law.


Don Willenburg

Employment Law