Estimates are that nearly 1 in 4 non-union employers require their employees to sign mandatory arbitration agreements as a condition of employment. These agreements are designed to keep workplace disputes out of courthouses and avoid expensive and protracted litigation. More and more, these arbitration agreements include clauses that bar employees from pursuing class or collective claims. Among other perceived benefits, these waivers eliminate the risk associated with high exposure aggregate litigation that plagues many industries. The enforceability of these agreements is governed by the Federal Arbitration Act (FAA). Generally speaking, under the FAA, an arbitration agreement can mandate the waiver of a procedural right but not a substantive one. Until recently, federal courts have largely held that these waivers of class or collective actions were lawful because the right to pursue aggregate litigation under the Fair Labor Standards Act (FLSA) and Federal Rule of Civil Procedure 23 was procedural, not substantive.
In 2012, a National Labor Relations Board (NLRB) decision generated headlines and left employers uncertain about the enforceability of their arbitration agreements. In D.R. Horton, the Board found that Section 7 of the National Labor Relations Act’s (NLRA) protection of the right to engage in “concerted activity” was broad enough to cover collective legal action. Under the Board’s view, an employer violates the NLRA when it requires employees, as condition of their employment, to sign an agreement that precludes them from filing joint, class, or collective claims addressing their wages, hours, or other working conditions against the employer in any forum, arbitral or judicial. The crux of the Board’s reasoning was that the right to engage in collective action—including collective legal action—is a core substantive right protected by the NLRA. But, to be clear, the Board did not find that he NLRA creates a right to class certification or the equivalent, just the right to pursue joint, class, or collective claims if and as available, without the interference of an employer-imposed restraint.
The Board’s broad interpretation of Section 7 rights and their interplay with the FAA was rejected by the Fifth Circuit Court of Appeals (which decides appeals from the states of Mississippi, Louisiana, and Texas) and other federal courts. Thus, in the years immediately following D.R. Horton most employers thought it was unlikely the Board’s view would gain momentum. But recently, the Seventh Circuit Court of Appeals (which decides appeals from Illinois, Indiana and Wisconsin), adopted the reasoning of D.R. Horton in the case Lewis v. Epic Systems Corporation, holding that an arbitration agreement that waives the right to pursue aggregate claims violates the NLRA.
The Seventh Circuit’s decision creates an important circuit split that will likely require clarification by the U. S. Supreme Court. In the meantime, judicial forum shopping will surely ensue. Employees who signed agreements waiving their right to class or collective actions will try to pursue those types of lawsuits anyway in the states of Illinois, Indiana, and Wisconsin, while employers will look to move any group actions out of those jurisdictions where possible. Employers should keep watching this issue, as it will likely be decided at some point by the Supreme Court, and its outcome will have a significant effect on the value of arbitration agreements.