News

While many are proclaiming a huge victory for employers with the recent decision by the U.S. Supreme Court in Epic Systems Corp. v. Lewis approving employers’ use of class action waivers in arbitration agreements, employers would be wise to proceed cautiously before implementing arbitration agreements in the workplace.

To be clear, arbitration means that a privately-hired “arbitrator” (typically a former judge or experienced lawyer) resolves a claim rather than a state or federal judge.

Under the decision, an employer could potentially now require job applicants or employees to go through “single plaintiff” arbitration in order to pursue a claim against the company rather than seek class-wide damages through the court system. Particularly for large corporations, this could be very beneficial. It could mean that an employer no longer has to worry about the 1,000, 5,000, or 10,000-person class action or seven-figure settlement that frequently results. However, arbitration has its own costs, risks, and limitations that are important to understand.

The Lead-Up To The Epic Decision
The Supreme Court’s decision in Epic Systems Corp. resolves the longstanding disagreement among federal courts on the enforceability of class action waivers in arbitration agreements.

This disagreement stemmed in large part from the National Labor Relations Board’s 2012 decision in D.R. Horton, 357 NLRB No. 184 (2012), which ruled that class action waivers in arbitration agreements violated the National Labor Relations Act (“NLRA”), a law that protects the right of workers to address the terms and conditions of employment as a group rather than as individuals.

The majority of federal courts, including the Second, Fifth and Eighth Circuits, disagreed with the Board’s decision, finding it inconsistent with another more relevant federal law: the Federal Arbitration Act (“FAA”). The FAA protects the right of private parties to opt for arbitration rather than court to resolve disputes. However, the Sixth, Seventh and Ninth Circuits took the opposite view, agreeing with the Board’s decision and disallowing arbitration agreements with class action waivers.

How Epic Resolved The Arbitration Question
In Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018), the Supreme Court held in a 5-4 decision that class action waivers in arbitration agreements are enforceable and that employers can require employees to agree to them as a condition of employment.

The implications of Epic Systems Corp. are significant. The case could potentially allow employers to avoid the class actions that have often driven risk assessments and calculations in recent years. Just think about that – a possibility of employment disputes without a serious class action risk!

Pros Associated With Requiring Arbitration
There may indeed be advantages to arbitration of employment disputes. From a pro-arbitration perspective, employers may prefer arbitration because it is often seen as less hostile, more flexible, more private, and more efficient in both time and resources. Likewise, arbitrators may be more business savvy than the average judge. In addition, as noted above, an arbitration clause with a class action waiver can potentially help businesses to eliminate their biggest employment law concern: an employment law class action.

Cons Associated With Requiring Arbitration
Although there are several good reasons to consider moving towards arbitration clauses with class action waivers (particularly in the current legal environment), employers will want to take into account the cons. Among other things:

Parties will need to be prepared to pay arbitrators $400, $500, $600 or more per hour to resolve claims. In other words, employers will need to be ready to cover not only their own lawyer, but the arbitrator as well. This could greatly increase the costs associated with resolving single-plaintiff disputes.
The rules in arbitration may be less clear, the decisions less predictable, and appeal rights non-existent. Although the absence of appeal rights can be great when a business prevails in arbitration, it can be frustrating and costly when a poor arbitration decision finds a business on the losing end with no appeal rights and no settlement leverage.
Plaintiff’s attorneys may resort to bringing a series of single-plaintiff arbitrations instead of one big class action. Although this may sound favorable, it is not always. Dealing with numerous individual arbitrations of claims rather than one class action could conceivably be more costly when one factors in cost for arbitrators and attorneys for each claim presented for arbitration. It could also give rise to inconsistent outcomes leaving businesses less sure of how to operate in the future.
“Blue state” legislatures and courts will look for ways to minimize the applicability of this Supreme Court decision. Parties could get caught in “satellite fights” with plaintiff’s attorneys on the proper venue or rules. In other words, parties could end up spending significant dollars just trying to get arbitration underway.
It is possible that applicable insurance policies may carve out arbitrations or otherwise limit coverage in arbitrations. Obviously, arbitration is much less inviting if it means foregoing insurance coverage.
Large employers that utilize single-plaintiff arbitration agreements may see negative PR or public backlash, as such employers may be seen as “bullying” or railroading employees. Recent “me too” movement press suggests that this is a material concern.

Drafting An Arbitration Agreement
Employers that elect to introduce mandatory arbitration should exercise great care in crafting an arbitration agreement. Potential landmines are real.

For example, in order for an arbitration clause to be enforceable, an employer will need to provide something of value (or “consideration”) to the employee in return. Some employers may provide dollars. Others may tie arbitration agreements to a promotion or end-of-the-year bonus. However, all employers must provide something. Most employers will want to identify the consideration employees are receiving in the arbitration agreement so as to avoid future disputes on this issue.

Employers will also want to carefully consider how they describe arbitration procedures. For example, some arbitration clauses call for a 3-arbitrator panel. Although such a requirement can lower the impact of a “bad” arbitrator, it can also cause arbitration-related fees to explode and precipitate undue scheduling delays.

In addition, employers will wish to carefully consider whether and to what extent the arbitration clause requires employees to share in arbitration costs or pay for the employer’s attorney fees if he/she loses. Although cost-sharing/fee-shifting may sound favorable in principle, it also could potentially lead to enforcement questions if it serves to “chill” an employee’s ability to obtain relief under applicable law. In other words, if an employee is potentially responsible for paying an arbitrator thousands of dollars in fees (even in victory) or tens of thousands in attorney fees in losses, he or she may not be positioned to seek relief for a $2,500 wage dispute, $1,000 vacation pay dispute, or $15,000 discrimination dispute. This requirement could be deemed “unconscionable” and cause the arbitration agreement to be scrapped entirely by a court.

Final Note
In sum, although the Supreme Court’s Epic decision is meaningful and provides a significant opportunity to lower class action risks, it does not yield black and white answers. Instead, it should be viewed as a signal to employers to begin a thoughtful conversation about where to go from here in regard to the use of arbitration in the workplace.

THE ABOVE COMMENTARY SHOULD NOT BE CONSTRUED AS LEGAL ADVICE. IT IS BEING PROVIDED FOR GENERAL INFORMATIONAL PURPOSES ONLY.