Class Action Waivers in Arbitration may not be enforceable.

Our law firm recently received an NLRB ruling holding that a company’s policy forcing all of it’s worker to arbitrate was illegal because it contained a waiver of class action.  This is significant because many minimum wage and overtime lawsuits under the Fair Labor Standards Act (FLSA) are defended by employers using a forced arbitration clause that prohibits class and collection actions.

BACKGROUND:

Q: What is the FAA?

A: Federal Arbitration Act Arbitration Agreements (FAA)  “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation  of any contract.” 9 U.S.C. §2.  The FAA “reflects an emphatic federal policy in favor of arbitral dispute resolution,” and States are not at liberty to interfere with this policy, even in furtherance of their own legitimate public policies. Marmet Health Care Ctr., Inc. v. Brown, 132 S. Ct. 1201 (2012).

Q: What is Class Action?

A:  Overtime and minimum wage class actions under Federal Rule of Civil Procedure 23 asserting violations of state wage laws. Any worker that was subject to the illegal wage and hour practice(s) are automatically part of the lawsuit.

Q: What is Collective Action?

A:  Collective actions under Section 216(b) of the Fair Labor Standards Act (“FLSA”) permits an individual or a small group of workers to file a lawsuit for unpaid overtime or unpaid minimum wage. The court will conditionally certify the class so that class notice can be sent out. At a later stage in the lawsuit, the court may consider the employer’s argument and motion to decertify the class.

Q:  What happens when an employer incorporates Class Action and Collective Action waivers in their arbitration agreement?

A:  In DR Horton, the NLRB held that class-action waivers violate employees’ rights to engage in concerted activities under Section 7 of the NLRA. D.R. Horton, Inc., 357 NLRB No. 184 (2012).  The NLRB has consistently held that waivers of class or collective action  in arbitration agreements between companies and their workers are illegal. Therefore, many employer’s arbitration agreement that prohibits class or collective action overtime and minimum wage lawsuits illegal.

Conflict between NLRB and the Fifth Circuit

In 2013, the Fifth Circuit had ruled that the FAA was of equal importance to the NLRA; that the courts cannot defer to NLRB decisions that conflict with another federal statutes like the FAA.  D.R. Horton, Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013). This does not give courts much guidance to employers and workers in FLSA cases.  One the one hand, class waivers is illegal under the NLRB ruling in D.R. Horton,  while on the other hand, the FAA makes arbitration clauses containing waivers of class and collective action of overtime and minimum wage claims under the FLSA as enforceable.

Conflict Between the Circuits

On May 26, 2016, the Seventh Circuit became the first U.S. Circuit Court of Appeals to accept the NLRB’s position and held that  Class, collective or representative proceedings are “concerted activity” and a protected right under Section 7 of the NLRA. Since the arbitration agreement in that case  required employees to relinquish a right that the NLRB had declared to be substantive, it was not enforceable under the FAA. Lewis v. Epic Sys. Corp., 2016 U.S. App. LEXIS 9638 (7th Cir. May 26, 2016)

Q: What will happen next?

A: When there is a conflict between the federal circuit courts, the U.S. Supreme Court will decide on the issue.

Many people think that the new administration will reverse the NLRB’s employee friendly position on class waivers. This is unlikely in the near future since the 4 year term for  Richard Griffin, the General Counsel for NLRB will not expire until November 4, 2017.

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