Companies Should Consider Updating Their Employment Agreements After Supreme Court Decision

Defending against employment discrimination class actions and wage-and-hour class or collective actions—whether meritorious or not—can have a significant impact on a company’s bottom line.  On Monday, however, a potential lifeline came in the form of a ruling by the United States Supreme Court.  In a long-awaited victory for employers, the Supreme Court held that arbitration agreements waiving an employee’s right to bring claims as class or collective actions are valid.  As a result of this decision, companies with larger workforces should consider implementing one-on-one arbitration agreements with their employees to limit exposure to this costly form of litigation. 

A closely divided Supreme Court ruled that class action waivers in arbitration clauses are enforceable under the Federal Arbitration Act and do not violate the National Labor Relations Act.  The Supreme Court explained that the FAA has long been interpreted to favor not only arbitration agreements generally, but also the parties’ chosen arbitration procedures. 

The Supreme Court’s decision rejected a 2012 decision by the National Labor Relations Board that class action waivers in arbitration agreements violate employees’ rights to engage in “concerted activity” under the NLRA.  According to the Supreme Court, the NLRA does not guarantee the right to utilize class or collective action procedures in lawsuits. 

Prior to the Supreme Court’s ruling, the Seventh and Ninth Circuit Courts of Appeal had held that arbitration agreements prohibiting employees from bringing or participating in class or collective actions violated the NLRA. By contrast, the Fifth Circuit Court of Appeals had held exactly the opposite.  Thus, the Supreme Court’s decision resolves the disagreement among the lower courts and provides clarity to employers across the country.

In the majority opinion, Justice Gorsuch noted that “[t]he 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 this statement could foreshadow future legislative action on this issue depending on the shifting political winds in Washington, employers now have a clear path to adopt class action waivers in their arbitration clauses without fear of NLRA violation. 

In light of the Supreme Court’s ruling, employers should revisit their employment agreements and consider including arbitration provisions waiving class and collective actions, particularly when assessing ways to minimize significant liability for wage and hour claims. Given the employee-focused framework of the FLSA, the minimal pleading threshold for bringing suit, the potential for large attorney fee awards, and the abundance of collective action proceedings generated by the FLSA, forcing individual arbitrations on these issues could provide a means of reducing liability exposure and defense costs. Of course, arbitration might not be the best fit for every case or for every company. Thus, before making the move to arbitration, companies should discuss the pros and cons with experienced employment counsel.