Court Decisions Now Mixed on Worker Arbitration Clauses

As I think about all of the agreements with arbitration provisions that I’ve drafted for clients over the years.

***wipes brow, tugs collar, clutches pearls***

Certain arbitration agreements may blunt certain federally-protected rights employees have to discuss working conditions with one another.

The National Labor Relations Board is not fond of agreements in which an employee is required to bring employment-related claims against an employer in arbitration (rather than in court) and one at a time (as opposed to a collective or class action). The Board posits that these agreements contravene the National Labor Relations Act. The Act, which applies in many union and non-union workplaces, guarantees employees the right to address working conditions together.

Class action arbitration clause challenged

So, when a Wisconsin-based company required certain groups of employees to agree to bring any wage-and-hour claims against the company only through individual arbitration, that agreement faced an initial challenge. An employee brought a collective action in federal court, contending that the company had violated the Fair Labor Standards Act (FLSA). The company sought to dismiss the case and compel the employee to arbitrate his wage and hour claims alone. However, the district court denied the motion, and the employer appealed to the Seventh Circuit Court of Appeals.

While acknowledging that other courts have reached different conclusions (more on that in a bit), the Seventh Circuit in Lewis v. Epic Systems Corp. affirmed the lower court’s decision, and struck the mandatory arbitration provision:

Epic’s clause runs straight into the teeth of Section 7. The provision prohibits any collective, representative, or class legal proceeding. Section 7 provides that “employees shall have the right to … engage in … concerted activities for the purpose of collective bargaining or other mutual aid or protection.” A collective, representative, or class legal proceeding is just such a “concerted activity.” Under Section 8, any employer action that “interferes with, restrains, or coerces employees in the exercise of the rights guaranteed in Section 7” constitutes an “unfair labor practice.” Contracts that stipulate away employees’ Section 7 rights or otherwise require actions unlawful under the NRLA are unenforceable.

Employee-arbitration agreements may be lawful

The Seventh Circuit in Lewis recognized a 2014 decision from the Ninth Circuit in Johnmohammadi v. Bloomingdale’s, Inc, which held that an arbitration agreement mandating individual arbitration may be enforceable where the employee had the right to opt out of the agreement without penalty.

Also, there is D.R. Horton, Inc. v. NLRB. In D.R. Horton, the Fifth Circuit concluded that the National Labor Relations Act conflicts with another federal law, the Federal Arbitration Act. The Fifth Circuit noted that the FAA “embodies a national policy favoring arbitration and a liberal federal policy favoring arbitration agreements.” Thus, any federal law to the contrary — even the NLRA — must take a backseat.

So, which is it, Eric? Can we require employees to individually arbitrate employment claims?

Say it with me, “It depends.”

Certainly yes in the Fifth Circuit (Louisiana, Mississippi, Texas). Probably not in the Seventh Circuit (Indiana, Illinois, Wisconsin), with the possible exception of giving employees the opportunity to opt out of the agreement without penalty. The Second and Eighth Circuits would appear to enforce the agreements. Elsewhere, we’ll see. At some point, the U.S. Supreme Court will take up this issue.

In the meantime, where I practice (in the Third Circuit), I’ll continue to draft these agreements for clients, where appropriate, until the Third Circuit or the Supreme Court says otherwise.