Supreme Court OKs Class Action Waivers in Employment Arbitration Agreements
It was a good start to the week for employers. That is because on Monday the U.S. Supreme Court issued its long-awaited decision in Lewis v. Epic Systems, and two other related cases, and held that class action waivers in employment agreements with arbitration clauses must be enforced as written. In reaching this conclusion the Court flatly rejected the National Labor Relations Board’s position that class action waivers are invalid because they violate an employee’s right to engage in protected concerted activity under Section 7 of the National Labor Relations Act (NLRA).
After six years of uncertainty, those employers with appropriate class action waivers in their employment agreements can breathe a collective sigh of relief. For all other employers, it may be time to reconsider whether an employment agreement that includes a class action waiver can reduce your liability exposure.
The question of whether a class action waiver in an employment agreement is enforceable was addressed by the NLRB in its decision in D.R. Horton. There, the NLRB invalidated such clauses in employment agreements, holding that they violated employee rights to engage in protected concerted activities under Section 7 of the NLRA. On appeal, however, the U.S. Court of Appeals for the Fifth Circuit overruled the decision on two grounds. First, the Fifth Circuit found that the right to proceed collectively is a procedural, not substantive, right that can be waived. Second, the court found that the NLRB’s interpretation invalidating such waivers in employment agreements conflicted with the Federal Arbitration Act (FAA), which favors the enforcement of employment agreements. The Fifth Circuit reaffirmed its position in Murphy Oil USA, Inc.
In 2016, however, the Seventh Circuit and Ninth Circuits ruled the opposite. In Lewis v. Epic Systems Corp. and Morris et al. v. Ernst & Young LLP et al., the courts held that the right to proceed collectively is a substantive right that an employee cannot be forced to waive.
The Supreme Court’s Decision
The circuit split led to the U.S. Supreme Court granting certiorari on Epic Systems, Ernst & Young, and Murphy Oil, and consolidating the cases. The majority decision, written by Justice Neil Gorsuch, held that:
Courts are required to enforce terms of employment agreements under the FAA, including terms requiring individualized arbitration.
The FAA’s savings clause, which permits courts to invalidate employment agreements “upon such grounds as exist at law or in equity for the revocation of any contract” only applies to contract defenses, such as “fraud, duress or unconscionability.”
There is no evidence that Congress intended for the NLRA to “override” the FAA.
Class actions are not concerted activities protected by Section 7 of the NLRA. Instead, Section 7 focuses on the right to “organize and bargain collectively” and it does not address (1) arbitration, (2) the right to bring class or collective actions; or (3) overriding the FAA.
The NLRB is not entitled to Chevron deference when it interprets the NLRA in a way that limits the purpose of other statutes such as the FAA.
This decision provides a powerful tool for employers that already have class action waivers in their employment agreements. Because the Supreme Court has now weighed in, the NLRB can no longer attempt to interfere in pending matters by ruling that the agreements are invalid. For those employers without an employment agreement that includes a class action waiver, it may be time to consider whether such agreements are appropriate for your business.