What the Appellate Court Split on Class Action Waivers Means for Employers

The National Labor Relations Act protects the right of all employees to engage in protected, concerted activities to address or improve their working conditions.

In 2014, some federal appellate courts started to recognize “concerted activity” as the right of employees to bring class or collective actions in lawsuits against their employers, typically for Fair Labor Standards Act violations.

Class actions are lawsuits whereby multiple parties with numerous, common claims are permitted with court approval to aggregate their claims and bring one lawsuit. The benefit of a class action suit for the employee in the FLSA context is that while an individual claim may be economically impractical for an employee, where they are able to aggregate such claims with other employees, the value of the claim quickly increases, thereby supporting litigation costs.

In order to minimize litigation exposure, employers began requiring employees to waive their right to bring class actions and agree to arbitrate the claims individually. To date, however, federal appellate courts have differed significantly on whether employers have the right to make this requirement. Recent decisions by several federal appellate courts continue that split.

In Lewis v. Epic Systems Corp., Epic Systems sent an email to some of its employees containing an arbitration agreement mandating that wage-and-hour claims could only be brought through individual arbitration and that the employees waived “the right to participate in or receive money or any other relief from any class, collective, or representative proceeding.” The agreement also said that by continuing to work at Epic Systems, the employees were accepting the terms. The email did not provide an option to opt out.

Jacob Lewis, an employee of Epic, filed suit in federal court without first proceeding under the arbitration clause, alleging that the company violated the FLSA by misclassifying him and fellow technical writers as exempt from the FLSA. Epic Systems moved to compel arbitration.

Lewis argued that arbitration provision violated the NLRA because it interfered with an employee’s right to engage in concerted activity. The court sided with Lewis and permitted his claims to go forward without first proceeding with arbitration. The 9th Circuit Court has similarly since adopted the position that employers are prohibited from enforcing class and collective action waivers via an arbitration agreement.

In contrast, in Sutherland v. Ernst & Young LLP, a clerical employee of Ernst & Young brought an action against the accounting firm for 151.5 hours of unpaid overtime wages, amounting to $1,867.02. She alleged that the arbitration clause requiring that “covered disputes pertaining to different employees will be heard in separate proceedings” effectively prevented her from pursuing her rights under the FLSA due to the prohibitive costs that would come with litigating the claim on her own as opposed to in a class action. The 2nd Circuit Court sided with Ernst & Young and found the waiver provision contained in the arbitration clause was enforceable.

The takeaway for employers from this judicial split is that location matters, particularly given that there is not, as yet, precedent from the U.S. Supreme Court that would apply across the country.

In Alaska, Arizona, California, Hawaii, Idaho, Illinois, Indiana, Montana, Nevada, Oregon, Washington and Wisconsin an arbitration provision waiving the right to class action is considered by the courts to be infringing an employee’s right to engage in concerted action under the NLRA. Conversely, in Arkansas, Connecticut, Iowa, Louisiana, Minnesota, Mississippi, Missouri, Nebraska, New York, Texas or Vermont employers may require an employee to waive the right to pursue claims collectively. In Ohio, the picture is even less clear, as none of the precedent discussed above applies.

When it comes to asking employees to waive their right to litigation, employers should keep several things in mind. First, they should take care not to prohibit employees on an individual basis from filing administrative claims or claims regarding FLSA violations. Second, employers should not engage in any activity that could be construed as limiting employees’ right to engage in concerted activity.

Finally, while we wait for the Supreme Court to decide the issue, employers should consider the state they are operating in before asking employees to waive their right to pursue class actions. If your state has not addressed the issue, a conservative approach would compel the conclusion not to include waivers of collective or class action in arbitration agreements.

Molly R. Gwin is an associate and litigator with Isaac, Wiles, Burkholder & Teetor LLC.