Supreme Court Rules That Employers May Require Employees to Arbitrate and Waive Their Right to Class Action Litigation

3 min

On Monday, the United States Supreme Court issued a ruling, Epic Systems Corp. v. Lewis, that permits employers to avoid class action lawsuits under the Fair Labor Standards Act (FLSA) and other employment laws.

Over the last decade, class action wage and hour lawsuits under the FLSA have been among the fastest-growing types of cases filed in both state and federal courts. The FLSA broadly governs the amount and manner in which employers must pay their employees. The law covers minimum wage, overtime, breaks, and scores of other issues. If an employer loses a FLSA lawsuit, the employee receives double damages unless the employer can prove a "good faith" defense, and the employer must also pay the employee's attorneys' fees. The FLSA also gives "similarly situated" employees the right to band together and bring a class action against their employer, which can lead to very significant damage claims against the employer.

Under the Epic Systems decision, employers may now require their employees to arbitrate FLSA claims and may prohibit them from asserting claims together as a class. In short, the Supreme Court ruled in a 5-4 decision (written by Justice Gorsuch, with Justices Alito, Kennedy, Roberts, and Thomas) that employer arbitration agreements with individual employees that preclude them from pursuing work-related claims on a collective or class basis are not prohibited under the National Labor Relations Act. Indeed, the Court continued, such "class action waivers" in arbitration agreements are valid under the Federal Arbitration Act, a federal law that encourages the resolution of disputes through arbitration, rather than in court. Justice Ginsburg delivered a strongly worded dissent from the bench (joined by Justices Breyer, Kagan, and Sotomayor), arguing that employees have no ability to reject employers' "take-it-or-leave-it" contractual provisions and that the National Labor Relations Act makes illegal contracts that deny employees the right to engage in concerted activity for mutual protection.

This is a major decision and one that many feel takes away an important tool that employees can use to hold employers accountable. The Obama administration had sided with the employees in this matter, but after the election, the Trump administration's Justice Department changed sides.

Nonetheless, nonprofit employers should consider whether to take advantage of the arbitration rule to reduce their risk of employee class actions and other employment litigation. The new decision will benefit only employers who successfully implement a binding arbitration policy for their employees. Implementing an enforceable workplace arbitration policy with a class action waiver is not automatic. Courts scrutinize workplace arbitration policies to determine whether their provisions are unfair, one-sided, or procedurally or substantively flawed. Going forward, it remains to be seen whether the positive climate for mandatory arbitration reflected in the Court's decision will mean that more arbitration provisions will be found acceptable, but for now, if a nonprofit employer wishes to implement a mandatory arbitration provision for employers, great care should be taken with the drafting.

Meanwhile, many will be watching to see whether the Supreme Court's ruling in Epic Systems will carry over to any other aspects of class action litigation, which is frequently used by consumers and small investors, as well as employees.