U.S. Supreme Court, in a 5-4 Ruling, Upholds Employers' Use of Class Action Waivers in Employment Agreements

In a closely watched and long-awaited ruling, the U.S. Supreme Court on May 21st held that it is lawful for an employer, in an agreement with an employee, to provide that all disputes be resolved through one-on-one arbitration between the company and the employee. Accordingly, an employee may waive his right to bring his claims in a class action or collective action.

The decision, in a case titled Epic Systems Corp. v. Lewis, resolved a split in authority between Circuit Courts of Appeal, and actually resolved three recent separate appellate court cases with very similar facts. (The other two cases involved employers Ernst & Young, and Murphy Oil USA.) In each instance, the employee had entered into an employment agreement with his employer, which referred disputes to arbitration, and which contained a class action waiver clause. In the Murphy Oil case, the Court of Appeals had upheld the arbitration/class waiver clause. In Epic Systems and Ernst & Young cases, the Courts of Appeal had denied enforcement of those clauses.

At issue was the friction between, on one hand, a consistent line of recent Supreme Court cases upholding arbitration clauses with class waivers, under the Federal Arbitration Act (e.g. Concepcion, Italian Colors, Kindred Nursing); and a doctrine first espoused by the National Labor Relations Board in 2012, in the D.R. Horton case, holding that an agreement purporting to waive class action rights was unenforceable, because it encumbered the fundamental right under Section 7 of the National Labor Relations Act for employees to engage in concerted activity for their mutual aid or protection.

The majority opinion, written by Justice Gorsuch, rejected the employees’ argument about Section 7 rights, holding that the NLRA “does not express approval or disapproval of arbitration. It does not mention class or collective action procedures. It does not even hint at a wish to displace the Arbitration Act—let alone accomplish that much clearly and manifestly, as our precedents demand.” The opinion further observed that unlike the NLRA, various other federal statutes contain very specific language about the manner in which disputes should be resolved, and “when Congress wants to mandate particular dispute resolution procedures it knows exactly how to do so.”

This is a very important ruling for employers. An employer considering whether to resolve disputes with its employees through arbitration might take be tempted to take a narrow view in weighing whether arbitration is worth the bother, compared to having disputes resolved in court. The arguments against arbitration go roughly as follows:  It is no longer cheaper than court. Discovery is allowed in arbitration. Cases take a long time to resolve. Arbitration fees can be substantial. And arbitrators are more likely to “split the baby”, and issue a compromise ruling in a case, even where the employer’s position is meritorious.

But this type of analysis overlooks an important additional factor. For it is now established law that an employment agreement containing an arbitration clause can preclude a wage-hour claim or discrimination claim from being brought in court as a collective action or class action. Employers who have been “on the fence” about whether to utilize arbitration agreements with class waiver clauses, because of the legal uncertainty about their enforceability, now have their answer. And if avoidance of class actions is a high priority for the company, now would be a good time to take action.