On May 21, the U.S. Supreme Court, in a 5-4 decision penned by Justice Neil Gorsuch, held that employers can include a clause in their employment contracts that requires employees to arbitrate their disputes individually and to waive the right to resolve those disputes through class actions and other joint proceedings. The Court ruled such requirements are enforceable under the Federal Arbitration Act (“FAA”).
The decision is a major victory for employers, as arbitration can be a tool to funnel employee disputes into out-of-court resolution and away from class actions. The ruling, moreover, takes its place in a lengthy and growing list of rulings by the Supreme Court enforcing arbitration agreements and the pro-arbitration policies of the FAA over the resistance of some lower federal courts and state courts.
The court addressed three cases in this decision:
- A class action from the Fifth Circuit against Murphy Oil USA Inc. under the Fair Labor Standards Act (“FLSA”);
- A wage and hour class from the Seventh Circuit against Epic Systems, a healthcare software company, alleging that it violated the FLSA; and
- A class action from the Ninth Circuit claiming Ernst & Young violated the FLSA and California labor laws by misclassifying employees to deny them overtime wages.
According to the majority decision, the FAA mandates enforcing the terms of an agreement to arbitrate, given that the FAA was enacted “in response to a perception that courts were unduly hostile to arbitration.” The FAA thus instructed courts to “respect and enforce the parties’ chosen arbitration procedures” – such as the agreement to “use individualized rather than class or collective action procedures.”
The appellee-employees argued that the National Labor Relations Act (“NLRA”), passed in 1935, rendered class action and other joint-proceeding waivers unenforceable in arbitration agreements because the NLRA gives workers the right to organize “and engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” The Supreme Court rejected that position, stating, “The NLRA secures to employees rights to organize unions and bargain collectively, but it says nothing about how judges and arbitrators must try legal disputes that leave the workplace and enter the courtroom or arbitral forum.”
“The policy may be debatable but the law is clear: Congress has instructed that arbitration agreements like those before us must be enforced as written,” wrote Justice Gorsuch.
Further, the majority refused to defer to the conclusion of the National Labor Relations Board (“NLRB”) that the NLRA trumps the FAA. The Court found such Chevron deference was inappropriate since the NLRB was interpreting the NLRA “in a way that limits the work of” the FAA. The majority also declined to defer to the NLRB’s prior conclusion that the NLRA trumps the FAA.
Justice Ruth Bader Ginsburg penned a strongly-worded dissent, deeming the majority’s decision an attack on “statutes designed to advance the well-being of vulnerable workers.”
The Epic Systems decision is good news for employers nationwide as it enhances their ability to limit exposure to employee claims in class arbitration, class actions, and other joint proceedings.
Moving forward, we see several potential developments:
- Undoubtedly, more employers will include class and joint-proceeding waivers in their arbitration agreements, and will make those agreements mandatory for new hires. This will become the norm for employers.
- Defenders of the decision point to an overall reduction in costs for all parties, as arbitration of individual disputes may allow for more efficient and quicker resolution of claims.
- Democrats in Congress likely will push to pass legislation to reduce the overall impact on employees from the Epic Systems decision. The passage of any such legislation, however, will be difficult in the Republican-controlled Congress.
- The logical underpinnings and reasoning in the Epic Systems decision have ramifications beyond the employment context. Pro-employee advocates have long argued that employment law or the relationship between employer and employee somehow justified different treatment than other contractual relationships meaning that the FAA did not apply or these special circumstances trumped the FAA. Likewise, in the consumer context, many pro-consumer advocates have raised a host of similar arguments that the relationship between consumer and businesses (such as credit card companies, auto finance entities, and debt collectors) provides justification for courts to disregard plainly worded arbitration provisions embedded in applicable contracts under supposed public policy rationales. Epic Systems reiterates the Supreme Court’s view that the FAA will govern the interpretation of arbitration provisions, including in the class action context, by reviewing the plain language used by the parties and will reject arguments that amount to a rewriting or failure to enforce the clear language in arbitration provisions.
Employers who do not have an arbitration program, or a program that has not been recently refreshed, might now consider adding or updating arbitration clauses to their agreements. Indeed, consumer-facing companies of all types can take additional comfort in the efficacy of arbitration agreements in designing and implementing arbitration programs for consumer claims.
Troutman Sanders advises clients in developing and administering consumer arbitration agreements, and has a nationwide defense practice representing employers in many types of class actions and individual claims. We will continue to monitor these developments.