In Epic Systems Corp. v. Lewis the Supreme Court Deals a Blow to Employee Class Actions

In a case that sharply divided the Supreme Court on ideological lines but which will delight many employers, the court ruled that employees who sign arbitration agreements can be precluded from participating in class actions and thus must litigate their cases on an individual basis.

This is to be contrasted with the current trend where plaintiff’s counsel identify an employer pattern or practice that allegedly violates an employment law, often the failure to pay overtime or systemic discrimination, and bring a class action litigation on behalf of all negatively impacted employees. The impact of the court’s ruling, authored by Justice Neil Gorsuch, will be to largely eliminate the threat of employee class actions, a renewed interest in alternate methods of dispute resolution, a greater number of employers who will make arbitration agreements standard protocol, and perhaps an increase in employment related arbitration.

The fact patterns of Epic Systems (a single decision deciding three cases pertaining to three separate employers: Epic Systems, Ernst and Young, and Murphy Oil) are not uncommon. In each case, the employer allegedly misclassified a group of employees as exempt from overtime.

The impacted employees all signed arbitration agreements that they would arbitrate any dispute before a single arbitrator whose decision would be final and binding. The agreement provided for all remedies available under law. Claims relating to different employees had to be heard in separate proceedings.

All of the plaintiffs brought actions in federal court alleging that their employers violated the Fair Labor Standards Act by failing to pay them overtime. Each employer moved to dismiss the federal actions and compel arbitration.

To put Epic Systems in perspective, a short history lesson is in order. Until 1925, courts were hostile to the extra-judicial private resolution of disputes. With the passage of the Federal Arbitration Act, Congress mandated that courts respect and enforce arbitration agreements. Arbitration is often thought to be more efficient, faster, and less expensive to prosecute than court-based litigation.

While there is language in the Federal Arbitration Act that it is not to be applied to employment agreements, SCOTUS has limited the impact of that language and in a series of pro-arbitration decisions starting in 1983 made it clear that it favors arbitration and will apply the Act unless Congress makes it clear that arbitration of a type of claim is unlawful. Epic Systems can now be added to the list as a literal and rigid enforcement of the Act.

The legal argument that the Act cannot preclude employee class actions comes from the National Labor Relations Act. Enacted 10 years after the Federal Arbitration Act, the NLRA assures employees the right to unionize or band together to negotiate with their employer as a group by guaranteeing them “the right to self-organization, to form, join, or assist labor organizations, to bargain collectively … and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” In a vigorous dissent, Justice Ginsburg argues that a class action is just another form of concerted activity — an activity protected by the NLRA.

The majority knocked aside this argument, essentially stating that since the NLRA does not expressly approve or disapprove of arbitration, the FAA prevails. While the majority’s position has appeal, particularly when one considers that at its core the NLRA is about the right to form labor unions and bargain collectively and not about the arbitration of employee lawsuits, there is the issue of equity.

Here, the dissent questions whether there is truly a bilateral “agreement” to arbitrate given that most employee arbitration agreements are not negotiated between parties of equal bargaining power. Rather, they are provided to new or current employees who are required to sign them as a condition of their employment or continued employment. Thus, employees are faced with a Hobson’s choice: the ability to litigate in a court of law via class or individual action, or arbitration and employment.

Given the Epic Systems decision, HR and corporate management teams should evaluate the value of arbitration agreements as class action avoidance and dispute resolution mechanisms. While the benefits may be that employee litigation is resolved privately and perhaps more quickly and efficiently, binding arbitration is not a panacea.

First, it does not preclude the ability of employees to file charges with the EEOC or state human rights agencies.

Second, forcing arbitration can have a negative impact on morale.

Third, arbitration is not appealable and arbitrators are not infallible and do get it wrong from time to time.

An erroneous ruling and or excessive damage award cannot be appealed and an arbitrator’s “findings of fact,” may haunt a company in future related litigation. These negatives have to be considered, but it also should be remembered that solid HR practices and regulatory compliance can also help inoculate a company from becoming a litigation target.

Richard Reice is the head of the labor and employment group at Hoguet Newman Regal &Kenney. He is an experienced litigator, counselor and labor negotiator. He has also served as the EVP of HR for a Fortune 500 company.