Although favored by employers, will arbitration agreements in the employment context become a thing of the past? Arbitration agreements within the confines of the employment relationship require employees to pursue work-related claims in arbitration, rather than in court. In addition to requiring employees to pursue their claims against their employers in alternative dispute resolution, these agreements often contain a class action waiver clause, which require the employee to agree to resolve employment claims on an individual basis, thereby barring the employee from pursuing or joining a class or collective action. Therefore, if an employee has signed one of these agreements containing such a waiver, in the event of a violation of the Fair Labor Standards Act (FLSA), for example, the employee would be prohibited from initiating an action in court or joining a class action.

Employers favor arbitration agreements because such proceedings offer expeditious, cost-effective resolutions shrouded in secrecy, while class actions waivers provide the added protection of avoiding large payouts to classes of employees. Without such agreements, the alternative is the judicial system. Courts are open proceedings with accessible dockets that allow for public scrutiny, which employers would like to avoid at all costs. Civil rights activists and employee rights groups, on the other hand, lobby against such agreements, arguing that they are one-sided and oppressive, since employees have little bargaining power to avoid signing them, and then must pay attorney and arbitrator fees in order to enforce an alleged wrong against them.

Arbitration agreements have come under even greater scrutiny in connection with the #MeToo movement, where employers have been able to resolve sexual harassment complaints in private, confidential settings, resulting in settlements that contain nondisclosure agreements, leaving the harasser faceless to commit such acts with other unsuspecting victims (e.g., Harvey Weinstein). The theory is that prohibiting arbitration in these instances will force these cases into the public light where they are not only subject to public criticism, but in many instances, criminal prosecution, thereby preventing future incidents from occurring.

However, even before the #MeToo movement, these provisions—in the employment context— have come under attack. For the past six years, arbitration agreements have traveled a torturous road through the court system. The Federal Arbitration Act (FAA) was established to ensure the validity and enforceability of arbitration agreements. For nearly 100 years, the FAA has stood as a beacon of that premise. However, in 2013, the National Labor Relations Board (NLRB) ruled that requiring employees to consent to resolve work-related disputes pursuant to an arbitration provision containing a class or collective action waiver, as a condition of employment, would violate the National Labor Relations Act (NLRA). In two separate opinions, the U.S. Court of Appeals for the Fifth Circuit rejected the NLRB's ruling, first in D.R. Horton v. National Labor Relations Board, 737 F.3d 344 (5th Cir. 2013), and, thereafter, in Murphy Oil USA v. National Labor Relations Board, 808 F.3d 1013 (5th Cir. 2015). Shortly after the Fifth Circuit decision in D.R. Horton, the U.S. Courts of Appeal for the Second and the Eighth Circuits also concluded that such agreements were enforceable.

However, in 2016, the Seventh Circuit ruled that arbitration agreements violated the NLRA and were not enforceable, creating a circuit split. The U.S. Courts of Appeal for the Sixth and Ninth Circuits sided with the Seventh Circuit, creating a deeply divided issue across the nation. In the midst of these cases, amendments made to the tax code in December 2017 precluded an employer from deducting attorney fees or settlement payments for sexual harassment claims if the resolution was subject to a nondisclosure agreement.

Then, last year, the U.S. Supreme Court took up the issue to resolve the circuit split in Epic Systems v. Lewis, 138 S. Ct. 1612 (2018). Also deeply divided, the majority held that employers may require employees, as a condition of employment, to enter into arbitration agreements that contain waivers of their ability to participate in a class or collective action. The ruling also included waivers of overtime and wage and hour claims under the FLSA. Therefore, in the event of a class action lawsuit, an employer can move to enforce such agreements and force the parties to individually file their claims in private arbitration.

In a turn of events this summer, the NLRB, which previously ruled that such agreements were unenforceable, did a complete about face by handing a win to employers. The NLRB ruled that:  

• An employer may discharge an employee for failing or refusing to sign a mandatory arbitration agreement.
• An employer may force employees to sign mandatory arbitration agreements in response to employees opting-in to collection actions under either the FLSA or state wage and hour laws.

The NLRB's decision in this regard may signal a conservative shift in a federal agency that has traditionally championed employee rights and has been expanding its scope and breath of employee protection over the past decade.

Acting swiftly in response to such developments, on Sept. 13, the House passed a bill called the FAIR Act, or Forced Arbitration Injustice Repeal Act. This expansive piece of legislation would amend the FAA to prohibit pre-dispute arbitration waivers in a number of instances including employment matters.  Moreover, the law would invalidate any existing employment arbitration waivers and outlaw pre-dispute class action waivers. The FAIR Act has a long way to go before it becomes law, but employers should be vigilant around this topic to protect themselves until (and if) the law changes.

Putting aside the tax code amendments and the FAIR Act, employers should still be cautious as an employer can be exposed to class or collective litigation in a variety of ways:

• First, agencies such as the Department of Labor (DOL) and the Equal Employment Opportunity Commission (EEOC) may continue to enforce the statutes that they are obligated to enforce, (i.e., the DOL enforces the Fair Labor Standards Act (FLSA) and the EEOC enforces Title VII) on behalf of a group of affected employees. Therefore, the DOL can still investigate an employer for violations of the FLSA and issue a finding demanding payment for violations of overtime regulations, for example, to all similarly situated employees.
• Second, states like California have passed or proposed private attorney general actions, which would permit claims on behalf of groups of employees. Similar bills are pending in Illinois, Vermont and New York.
• Third, consider whether your employees may retaliate after being forced to sign such agreements. A good example of this was the Google walkout last year, where employees protested the use of arbitration agreements as a way to hide or cover up employee sexual harassment claims.
• Fourth, these agreements may imperil the employee's at-will status. At will, in the employment context, means that the employer or the employee can terminate the employment relationship at any time and for any reason, or no reason at all. The more contractual restrictions an employer places on at-will employees, the more they begin to appear to be contract employees and not at will.
• Lastly, some plaintiffs lawyers are extremely skilled in filing multitudes of arbitration claims in response to employers who have such arbitration agreements. Therefore, if one employee brings their DOL right to sue notice to the attorney, the attorney can obtain the DOL findings, and threaten to file (or simply file) individual arbitrations for each employee cited by the DOL. Rather than defend one class action, the company would be forced to defend hundreds of arbitrations. The question then becomes whether such agreements actually produced the cost savings that such agreements are intended to produce.

Will arbitration agreements and class action waivers remain viable options to employers seeking to protect their business interests? Only time will tell, but the window of protection seems to be narrowing. While such agreements provide significant benefits to an employer, they are not for every employer and not for every circumstance. Employers must proceed with caution when implementing such agreements and waivers and should seek legal counsel before taking action.

Christina M. Reger is a member of Griesing Law and chair of the firm's employment practice group. Reger handles litigation and counseling matters related to labor and employment for corporate, entrepreneurial and start-up enterprises. Contact her at [email protected] or 215-809-2017.