5-4 majority says employers can enforce arbitration agreements with employees.
Arbitration agreements in employment often require employees to agree to waive their ability to bring class action or collective litigation. In its place, the employee agrees to participate in arbitration proceedings involving just the employee’s dispute. The enforceability of these types of waiver clauses in employment agreements has been litigated across the country for years, and there was a split in the federal circuit courts on whether such agreements violated the National Labor Relations Act (NLRA). A recent US Supreme Court decision has now answered that question.
Arbitration is an alternative to litigation for resolving disputes. It is a process that takes place outside of the courts and involves the hearing of a dispute by a person or person(s) agreed to by the parties. It is usually voluntary, agreed to by contract, and involves a single dispute. In court litigation, on the other hand, parties may choose to bring class action lawsuits that include a large group of individuals claiming to have suffered a similar harm.
In employment cases, employees largely bring class action litigation over wage and hour disputes, including overtime, waiting time penalties, and other matters. Group litigation may also involve claims of sexual discrimination or litigation over misclassification of workers as independent contractors rather than employees. Arbitration agreements may include terms that require employees to give up this ability to bring a group or collective lawsuit when facing one of these types of dispute and instead going into private arbitration to settle just the one employee’s dispute.
The Supreme Court considered the validity of such agreements between employers and employees. On May 21, 2018, it held that employers may enforce arbitration agreements signed by employees that bar them from bringing class-action lawsuits and require individualized arbitration. It found that the Federal Arbitration Act (FAA) instructs courts to enforce the terms of arbitration agreements, including terms requiring one-on-one arbitration proceedings. It also found that the NLRA says nothing about how legal disputes must be resolved. “Far from conflicting, the Arbitration Act and the NLRA have long enjoyed separate spheres of influence and neither permits this Court to declare the parties’ agreements unlawful,” wrote Justice Neil Gorsuch for the majority. Employers and employees alike have been awaiting this decision that was a 5-4 ruling.
This decision resolved three cases. Ernst & Young LLC v. Morris involved whether an employer was barred from requiring an employee to arbitrate claims against it rather than on a collective basis given a collective bargaining provision in the NLRA. In Epic Systems Corp. v. Lewis, the issue was whether a waiver of class action and collective proceedings is enforceable under the FAA, notwithstanding the NLRA. Finally, NLRB v. Murphy Oil USA, Inc. concerned whether arbitration agreements with employees that barred them from bringing class action lawsuits was an unfair labor practice in violation of the NLRA because it limited employees’ rights to engage in “concerted activities” in the pursuit of “mutual aid or protection.”
In considering these employer-employee agreements, the Supreme Court found that Congress had long ago instructed the courts to enforce arbitration agreements according to their terms. This focus came out of wanting to bring an end to hostility to arbitration and a policy under federal law to favor such agreements. The congressional direction included a deference for terms the parties had chosen to include in the contract.
The Supreme Court then turned to the question whether the protections under the NLRA trumped the FAA when it came to agreements with employees. In considering this argument, it explained the heavy burden that must be met to show the trumping of one law over another was Congress’s intent. It explained that the NLRA is a federal law designed to provide private employees with certain rights and encourages collective action by workers within the workplace. Reviewing the law, it found the NLRA only involves employees’ rights to “concerted activity” on matters in the workplace and does not delve into the arena of employees’ rights in resolving disputes in a collective way. The majority noted that the NLRA “does not hint at displacing the FAA, which strongly favors arbitration.” It also explained that it had never read a right to class actions into that law and neither had the National Labor Relations Board, the federal agency with responsibilities to enforce the NLRA.
A lengthy dissent written by Justice Ginsburg started by calling the majority ruling “egregiously wrong” and in the end called on Congress to override the decision by passing legislation. The dissent referred to an “extreme imbalance” in the workplace which led to the NLRA protections and contended that those protections include the ability to pursue collective litigation. The FAA, according to the dissent, does not “shrink the NLRA’s protective sphere.”
While Justice Gorsuch’s majority opinion recognized that “Congress is of course always free to amend this judgment,” it noted there is “nothing suggesting” the NLRA displaces the FAA. The majority succinctly summed it up: “The policy may be debatable but the law is clear: Congress has instructed that arbitration agreements like those before us must be enforced as written.”
While larger companies are generally more likely to require these agreements as part of employment, this recent decision may result in more employers exploring them as an option. Companies taking this review should consider obtaining legal advice as to drafting such provisions and carefully take into account the differences with resolving disputes through this alternative dispute arbitration process.