Gina M. Roccanova of Meyers Nave Riback Silver & Wilson.

Fast-food chain Chipotle Mexican Grill, Inc. has found itself at the center of the ongoing debate over mandatory arbitration provisions in employment agreements. That debate has always assumed that arbitration clauses favor employers. However, the most recent developments in a wage-and-hour case against Chipotle have called that assumption into question.

A federal district court judge in Colorado recently dismissed more than 2800 plaintiffs from a wage-and-hour collective action against Chipotle brought under the Fair Labor Standards Act. (Turner v. Chipotle Mexican Grill, Inc., Case No. 1:14-cv-02612-JLK). The court in that case had initially certified a class of approximately 10,000 Chipotle employees on a claim that the company required them to work off the clock and clocked them out automatically at certain times. While the case was pending, the United States Supreme Court issued its decision in Epic Systems Corp. v. Lewis, which upheld the legality of arbitration clauses that prohibited collective actions. As a result of that decision, the court in the Chipotle case ruled that the 2,814 class members who had signed similar arbitration agreements could not proceed as class members, but would have to pursue their claims individually in arbitration.

Chipotle then sought to disqualify counsel from representing the dismissed plaintiffs in arbitration, arguing that class counsel should not have sent notices to employees bound by arbitration agreements. The court denied that motion, and refused to stay the ruling or certify the issue for appeal, thus allowing the arbitrations to proceed. Since then, some commentators have suggested that Chipotle's push to enforce its arbitration provision may end up backfiring. (“Chipotle's Mandatory Arbitration Agreements Are Backfiring Spectacularly” (Huffington Post, 12/20/ 2018) and “Chipotle May Have Outsmarted Itself by Blocking Thousands of Employee Lawsuits Over Wage Theft” (Los Angeles Times, 01/04/2019))

There are several reasons why employers continue to favor individual arbitration over collective actions in court. The most obvious and important reason is the fact that most plaintiffs in a collective action—whether opt-in or opt-out—would not have the resources or inclination to file a claim on their own. Even in the Chipotle example, in which a motivated plaintiffs' counsel is aggressively coordinating and filing arbitration claims, only 150 of the more than 2,800  dismissed class members have filed individual claims. In most instances, the proportion will be even lower. In wage-and-hour cases, like many consumer class actions, any individual recovery may be minuscule—a pennies per hour difference based on alleged miscalculations of the “regular rate of pay,” or the one-hour's pay penalties required in California for missing meal and rest breaks. Weighed against that upside are the substantial burdens of arbitration. Even in cases handled on a contingency fee basis, plaintiffs may have to advance costs up front, may lose income while appearing for depositions and hearing dates, and must bear the less quantifiable emotional and time burdens of litigation. In class actions, that burden is shared, and is borne largely by the lead plaintiff, who if successful is rewarded with a greater share of the recovery. In addition, collective actions are expensive to defend, and employers are liable for the plaintiff class' attorney fees even if the individual recovery is small. Because collective actions force employers to manage one very large risk instead of many smaller ones, there is enormous pressure to settle once a class has been certified.

In light of these circumstances, it is easy to understand why employers prefer to defend these claims one by one.However, arbitration may not be the panacea it was once thought to be. Contrary to expectations, it is not necessarily faster, cheaper, or more efficient than litigation. Moreover, arbitration alone will not necessarily relieve employers of the burden of litigating claims collectively. Unless an arbitration clause is worded in such a way as to explicitly prohibit collective actions, an arbitrator may exercise the authority to decide claims brought in arbitration on a collective basis, and that decision will be subject only to the very narrow scope of review permitted by state or federal law. Without the limitation on collective actions, arbitration may actually be a less friendly forum for employers than the courts. And in California, even an arbitration provision that explicitly prohibits collective actions will not prevent an employee from bringing a collective action under the Private Attorney General Act. There are other reasons why employers may wish to forego arbitration requirements, particularly outside the context of wage-and-hour claims. The advantages of individual arbitration are less pronounced in discrimination and retaliation cases than they are in wage-and-hour matters. In discrimination cases, the individual recoveries are apt to be higher, and plaintiffs have a stronger emotional stake in the outcome, which makes them more willing to bear the burdens of pursuing individual claims. Those cases are also more difficult for plaintiffs' counsel to litigate on a collective basis, given the fact that it is harder to establish uniformity among the individual plaintiffs' experiences. While not impossible, there are simply fewer collective actions based on discrimination and retaliation.

Arbitration clauses are also under attack in the California legislature and in the court of public opinion. Recently, several high-profile companies have removed the arbitration requirement from their employment agreements under public pressure. And in California, while Governor Brown vetoed several attempts to prohibit mandatory arbitration of discrimination and retaliation claims, there is no indication whether Governor Newsom will follow suit.  Given these factors, both inside outside of the courtroom, many employers are narrowing their arbitration provisions or abandoning them altogether. While a well crafted arbitration provision that applies only to wage-and-hour cases and clearly prohibits collective actions may still be worth the effort, at least outside of California, the advantages of arbitration provisions may continue to diminish.

Gina M. Roccanova is a principal at Meyers Nave and chair of the labor and employment practice group, where she serves public and private clients with nearly 20 years of experience in negotiations, counseling, litigation, arbitration and training. She can be reached at [email protected].