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May 21, 2018

The United States Supreme Court Rules that Employment Agreements Barring Class Actions are Lawful

On May 21, 2018, the United States Supreme Court (the “Court”) ruled that employment contracts requiring employment disputes to be resolved through separate and individual arbitration proceedings do not violate federal law. The Court sided with employers and the Justice Department in a trio of cases (NLRB v. Murphy Oil USA, Epic Systems Corp. v. Lewis, and Ernst & Young v. Morris) wherein employees entered into agreements stating that employment disputes would be decided through arbitration and that claims “pertaining to different [e]mployees [would] be heard in separate proceedings.” In other words, these employment agreements banned employees from proceeding on a class or collective basis. Such waivers, the Supreme Court ruled, are enforceable.

In 2012, the National Labor Relations Board (the “Board”) had ruled that employment agreements requiring employees to use arbitration for all work-related disputes interfered with employees’ right to engage in concerted activities under the National Labor Relations Act (NLRA). Murphy Oil USA, Inc. and Sheila M. Hobson. Such “class waivers,” the Board reasoned, denied employees with a means of taking collective action. However, in June of 2017, the United States Justice Department abandoned its support of this position.

Writing for the majority, Justice Neil Gorsuch stated, “[A]s a matter of law the answer is clear. In the Federal Arbitration Act (FAA), Congress has instructed federal courts to enforce arbitration agreements according to their terms—including terms providing for individualized proceedings." The Court rejected the employees’ argument that the FAA’s provision allowing courts to refuse to enforce arbitration agreements if they violate existing laws provides justification for voiding the agreements at issue. Instead, the Court found that the FAA only justifies voiding arbitration agreements based on “generally applicable contract defenses, such as fraud, duress, or unconscionability.” The NLRA’s concerted activity provision only refers to the right to organize unions and bargain collectively; it does not govern class or collective action procedures. Accordingly, the concerted activity provision has, according to the majority, no bearing on employment contracts requiring mandatory individual arbitration.

Nevertheless, including a class waiver in the arbitration provision of an employment contract does not guarantee that an employer is protected from multi-claimant litigation. In California, the Private Attorneys General Act (“PAGA”) provides employees with a private right of action against a California employer in order to collect penalties on behalf of the state’s Labor and Workforce Development Agency (LWDA). Further, the Department of Labor, the Equal Employment Opportunity Commission (“EEOC”), state labor boards, and administrative agencies may still pursue relief for employees under local statutes irrespective of class-waivers.


Takeaway

Now that the Court has ruled, it is clear that employers may enter into employment agreements that require employees to arbitrate employment grievances individually and separately. Employers who do not yet have arbitration agreements that require separate, individual proceedings may wish to adopt such agreements. The Supreme Court has made clear that the NLRA is no longer an impediment to such procedures. Employers, however, should be cautious of the fact that state and municipal bodies might still provide a mechanism for multi-claimant litigation.