In a sign that the pendulum may be swinging away from Obama-era protections for employees, the U.S. Supreme Court in May upheld that employers could require employees to resolve employment-related disputes through arbitration and preclude them from participating in class actions.
The case, Epic Systems Corp. v. Lewis involved a healthcare software company based in Wisconsin, which required employees to resolve any employment-based disputes with the company through individual arbitration and to waive their right to participate in or benefit from class action. A former employee, technical writer Jacob Lewis, sued Epic in U.S. District Court as a class action, claiming the company had denied him and other technical writers overtime pay owed to them. Epic, citing the waiver clause, attempted to have the suit dismissed.
The lower court ruled that the waiver was unenforceable because it violated the right of employees to engage in concerted activities under the National Labor Relations Act, but the Supreme Court, in a 5-4 decision, sided with Epic.
“The decision is huge because now employees can’t join a collective or class action [when such an agreement is in place],” said Jonathan Farrell, partner and co-chair of the labor and employment law practice group at Meltzer Lippe in Mineola.
The bottom line of the Epic ruling, according to Meyer Suozzi member Lois Carter Schlissel, is that “employers and employees can enter into mandatory arbitration agreements whereby they agree to use arbitration for disputes related to employment, ranging from sexual harassment to discrimination to wage-and-hour matters, and it will be done on an individual basis.” Schlissel, who is based in Garden City, leads Meyer Suozzi’s employment law practice and is an active member of the firm’s commercial litigation and dispute resolution department.
Class actions are particularly prevalent in wage-and-hour disputes, such as when a group of employees is misclassified as exempt and therefore denied overtime that they are entitled to, or when they are paid less than minimum wage. Because an individual wage-and-hour case will typically involve a relatively small amount of money, plaintiff’s attorneys often will not take them on. But if a group of workers unites to bring a class action against the employer, the dollar amounts could rise into the hundreds of thousands of dollars or more.
Howard Miller: The waiver is especially important in situations where there is some argument over whether employees could be classified as exempt or non-exempt. (Photo by Bob Giglione)
“Class actions were meant as a vehicle in which people who were not in a position to go toe to toe with a big company would be able to get money that’s owed to them,” Howard Miller, a member in the labor and employment practice in Bond Schoeneck & King’s Garden City office, said. “But unfortunately in some circumstances, they’re used to coerce settlements when an employer has done nothing wrong. As with every other thing that was well-intended, it could be subject to abuse.”
Mandatory arbitration agreements are not a new concept, Schlissel said, noting that the courts have regularly enforced such agreements.
“Part of the reason for this is that the long-standing Federal Arbitration Act says arbitration agreements calling for mandatory arbitration on an individual basis are to be enforced,” she said, though noting there are exceptions. For instance, if an employee went to court claiming the arbitration agreement was unconscionable, then the court would take a look and make a determination.
“Let’s say the agreement was tucked away in the back of a handbook, in small print and never brought to anyone’s attention,” Schlissel said. “Then there could be a question about whether it’s unconscionable.”
Since courts have long enforced arbitration waivers, what’s all the excitement about the Epic case?
“The answer relates to class actions,” Schlissel said. “In 2012, the National Labor Relations Board – a federal agency responsible for enforcing federal labor laws – ruled that arbitration agreements that require employees to waive the right to participate in class actions were unlawful.”
The long-standing National Labor Relations Act says laborers have the right to band together, bargain collectively and join unions – to participate in “concerted activities” – to help balance the negotiating power between an individual employee and an employer.
“The NLRB said requiring employees to waive the right to participate in class actions was like saying employees had to go it alone – with regard particularly to wage-and-hour claims – and they shouldn’t be forced to do that, because the NLRB protects concerted activities,” Schlissel said.
Following that 2012 ruling, “some courts in the country deferred to it, while some ruled that it was incorrect [because of the Federal Arbitration Act], so there was a split among the lower courts,” Schlissel said. “So in the Epic case, the Supreme Court majority disagreed with the NLRB on the long-standing Labor Relations Act, saying while it protects workers’ rights to participate in concerted activity like joining unions and bargaining collectively, it doesn’t apply to class actions.”
The best thing for employers to do at this juncture, Schlissel said, is to consider whether mandatory arbitration is right for their workplace and business.
“In considering that question, it would be important to consider the advantages and disadvantages of mandatory arbitration,” Schlissel said.
One advantage is confidentiality, she said.
“When a case goes to court, everything that’s filed can in most cases be accessed by the public and media,” she said. “Confidentiality is a benefit of arbitration.”
Arbitration is also far more expeditious, since it’s a streamlined process, and it’s usually (but not always) less costly, she said.
But Farrell cautions “companies that think arbitration is a panacea” should remember that there is a cost, and it can be significant.
“It could cost employers $15,000 to $50,000 a case,” he said.
Even when there is an arbitration agreement in place, employees can still file a claim against the employer with the Department of Labor, Miller said.
“My concern is employees who may or may not be aware of their rights and a company being able to take advantage of that,” Miller said. “I think most employers play by the rules but there are some that don’t. But if I was an unscrupulous employer, I would be kidding myself to think that once I have a class action waiver in hand that I could go about violating the law. Maybe the plaintiff’s side will have to make more of an effort to round up individuals, but there’s still the risk for multiple arbitrations for violating the wage-and-hour rules.”
Companies that choose to go with an arbitration policy should roll it out carefully in consultation with their attorney, Miller said.
“When there is some argument over whether employees could be classified as exempt or non-exempt, it would be helpful to have the waiver,” he said. “The big ticket is wage-and-hour class actions – they’re gold mines for the plaintiff’s bar.”
For companies “with hourly employees who are clearly getting overtime and who are paid above minimum wage,” there’s not much risk of a class-action wage-and-hour case, Farrell said. But for companies in the restaurant or home healthcare industries – where there are often disputes about tip credits and hours worked, respectively – having a mandatory arbitration agreement in place is key, he said.
A potential drawback of arbitration agreements is backlash from employees, Schlissel said. While it’s relatively clear-cut to present a new employee with an agreement prior to or on the first day of employment, existing employees may not appreciate being told they now are subject to the policy.
“It is key to give ample notice and meet with employees to make sure they have a clear understanding of the program before initiating it,” Schlissel said. “New York does not require employee signatures but I would recommend getting employees to sign a document, so the employer won’t be put in a position where they are defending whether the agreement is unconscionable. Employees should also be given a copy of the agreement.”
Employers who decide it’s a good fit for them “should first develop the contours of a dispute resolution program,” Schlissel said. “It should include pre-arbitration mechanisms to dissolve disputes. Employers who are going this route may decide there are ways to address employee concerns without going to formal arbitration. This could be as simple as an open door policy to something slightly more formal, such as appointing an ombudsman in the company to help resolve problems. It could specify that problems would go to mediation, which is not as formal as arbitration and brings parties together before a mediator, who tries to facilitate a resolution. It may sound like a lot of work but the real advantage to pre-arbitration mechanisms is they are much quicker, less costly and can bring parties together for the advantage of both.”
This process could also provide an avenue for the resolution of employee concerns that do not rise to the legal level, she said.
The arbitration agreement should designate the organization that is going to be used to administer the arbitration, and it should address allocation of arbitration fees, all or most of which are typically assigned to the employer, she said. It should also specify which employees and what kinds of claims are covered.