In May the United States Supreme Court issued a long-awaited decision in a trio of cases that concerned whether employers can lawfully use mandatory arbitration agreements containing provisions that preclude employees from pursuing employment claims on a class action basis – and instead require them to pursue their claims in an individual private arbitration proceeding against the employer.  In a 5-4 decision, the Supreme Court decided that such provisions are legal and do not violate the provisions of the National Labor Relations Act, which provide non-management employees with the right to take collective action (including, but not limited to the formation of a union) with respect the terms and conditions of their employment.  See Epic Systems Corp. v. Lewis, Docket No. 16-285 (decided May 21, 2018).

The Epic Systems decision has paved the way for employers to use of such agreements to bar employees from participating in collective action lawsuit under the federal Fair Labor Standards Act, in which a single employee can file suit on behalf of themselves and other similarly situated employees to recover unpaid overtime or to recover for violation of the law’s minimum wage payment requirements.  In these cases, one employee is often able to certify a collective action, and the employer is then required to provide the names and mailing addresses of all similarly situated current and former employees to facilitate the Plaintiff’s attorney solicitation for these employees to join (opt in) the collective action lawsuit.  FLSA collective actions involving relatively small amounts of unpaid wages can result in significant liability, including liquidated (double) damages and an award of attorney fees to the Plaintiff’s counsel.  FLSA collective actions have grown increasingly popular with the Plaintiff’s bar due to the relative ease of certification of a collective action and the availability of statutory attorney fees, which can often dwarf the amount of the wages actually owed.

With the benefit of the Epic decision, it is now clear that a well-drafted mandatory arbitration agreement can be used to prevent employees from pursuing collective action litigation in this manner.  As the dust settles on this important decision, employers should take the opportunity to revisit whether or not mandatory arbitration agreements are appropriate for use with their workforce.

There are certainly benefits that may result from the use of employment arbitration agreements, including:

  • Avoidance of collective and class action lawsuits brought by employees under the FLSA and other state and federal statutes.
  • The employment dispute will be decided by an arbitrator (likely an attorney) who is well-versed in the law and on the average less likely to render a volatile decision than a jury.
  • Arbitration proceedings are private.
  • Discovery (depositions and document requests) is typically more streamlined in arbitration.
  • Arbitration proceedings can be resolved more quickly than some judicial proceedings.

But employers should also consider certain drawbacks presented by the arbitration process:

  • Arbitration of employment disputes are subject to certain “due process” considerations to make the process fair to employees – including the requirement that the employer pay the arbitrator’s fee (in court litigation neither party pays the judge’s salary).
  • Arbitrators are less likely to consider prehearing motions for summary judgment to dismiss the employee’s claims prior to an arbitration hearing. Although the likelihood for success varies with the judicial forum, employers generally have a good success rate on pretrial motions.
  • Some arbitrators have a propensity to try to reach a “fair” result, rather than the correct legal result. In these cases, an arbitrator may decide to “split the baby” and award something to an employee who was treated “unfairly,” even though the claim has no legal merit.
  • As a general matter, there is no right to appeal a bad arbitration award, even when it is clear that the arbitrator’s decision is factually or legally incorrect.

Also, employers should be aware that arbitration agreements will not be effective in preventing government agencies, such as the Equal Employment Opportunity Commission or the Department of Labor, from pursuing enforcement actions on behalf of its employees on a class-wide basis, as the Supreme Court has previously held that government agencies are not bound by the terms of private arbitration agreements.

The Supreme Court’s recent decision certainly provides another reason (avoidance of employee class action lawsuits) for employer’s to reconsider the benefits of mandatory arbitration agreements.  But employers should carefully weigh the costs and benefits unique to their workforce, employment claims experience, the court system in which employment claims are typically brought against the company and other factors before deciding.  Employers who decide to establish an arbitration program for use with employees should also work closely with counsel to ensure that the agreement is tailored to meet the employer’s needs and to ensure that the agreement is drafted in a manner that will be enforceable.